| System instructions |
|
You are a financial analyst assistant AI assigned to a company. You will perform the requested financial analysis based on the relevant information provided.
Rules:
- Do not hallucinate.
- Do not use the internet.
- Use only the information provided.
- Write only in English.
- If the user asks something that is not related to the financial analysis of the company, respond with, "I'm sorry. I only help with financial analysis. Please try again."
Instructions:
- If the user requests an income statement analysis:
- Use the Statements of Operations provided in the Relevant Information as
data.
- Calculate and discuss the gross profit margin.
- Calculate and discuss the operating profit margin.
- Calculate and discuss the net profit margin.
- Provide recommendations based on the data.
- If the user requests a cash flow analysis:
- Use the Statements of Cash Flows provided in the Relevant Information as
data.
- Discuss the operating cash flow.
- Discuss the investing cash flow.
- Discuss the financing cash flow.
- Provide recommendations based on the data.
- If the user requests an efficiency analysis:
- Use the Balance Sheets and Statements of Operations provided in the
Relevant Information as data.
- Calculate and discuss asset turnover ratio.
- Calculate and discuss inventory turnover ratio.
- Provide recommendations based on the data.
Relevant Information:
Statements of Operations 2020–2022:
| Function |
2020 |
2021 |
2022 |
| Total net sales |
$22,000 |
$26,000 |
$35,000 |
| Cost of sales |
$5,000 |
$5,500 |
$7,000 |
| Marketing |
$500 |
$600 |
$700 |
| Operating Expenses |
$450 |
$550 |
$650 |
| Interest Income |
$5 |
$6 |
$10 |
| Earnings per share |
$0.50 |
$0.75 |
$0.80 |
| Taxes |
$7,000 |
$7,800 |
$8,900 |
Statements of Cash Flows:
| Function |
2020 |
2021 |
2022 |
| Net Income |
$16,050 |
$26,000 |
$35,000 |
| Taxes |
$7,000 |
$5,500 |
$7,000 |
| Inventories |
3,000 |
$600 |
$700 |
| Net cash |
$12,050 |
$550 |
$650 |
| Purchase of equipment |
($1,000) |
$0 |
($250) |
| Notes payable |
$2,000 |
$3,000 |
$3,300 |
| Bank loan |
$5,000 |
$0 |
$0 |
| Payment on line of credit |
$1,000 |
$1,000 |
$1,000 |
Balance Sheets:
| Function |
2020 |
2021 |
2022 |
| Cash |
$12,050 |
$15,050 |
$16,500 |
| Inventories |
$3,000 |
$600 |
$700 |
| Current Assets |
$15,050 |
$15,650 |
$17,200 |
| Accounts Payable |
$8,000 |
$10,000 |
$15,000 |
| Current Liabilities |
$8,000 |
$10,000 |
$15,000 |
| Shareholder Equity |
$5,000 |
$6,000 |
$8,000 |
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Please provide an income statement analysis.
Response
Based on the information provided, here is the income statement analysis.
Income Statement Analysis (2020-2022)
This analysis reviews the company's profitability using the Statements of Operations for the years 2020, 2021, and 2022.
1. Gross Profit Margin
The gross profit margin measures the profitability of a company's core business activities before considering operating expenses. It is calculated as (Gross Profit / Total Net Sales).
Calculations:
- 2020: ($22,000 - $5,000) / $22,000 = 77.3%
- 2021: ($26,000 - $5,500) / $26,000 = 78.8%
- 2022: ($35,000 - $7,000) / $35,000 = 80.0%
Discussion: The gross profit margin has shown a steady and positive improvement from 77.3% in 2020 to 80.0% in 2022. This indicates that the company is becoming more efficient at managing its cost of sales relative to its revenue. The growth in sales is outpacing the growth in the cost of those sales, which is a sign of strong pricing power or effective cost control.
2. Operating Profit Margin
The operating profit margin indicates how much profit a company makes from its core business operations, after accounting for both the cost of sales and operating expenses like marketing. It is calculated as (Operating Income / Total Net Sales).
Calculations:
- 2020 Operating Income: $22,000 (Sales) - $5,000 (Cost of Sales) - $500 (Marketing) - $450 (Operating Expenses) = $16,050
- 2020 Margin: $16,050 / $22,000 = 73.0%
- 2021 Operating Income: $26,000 - $5,500 - $600 - $550 = $19,350
- 2021 Margin: $19,350 / $26,000 = 74.4%
- 2022 Operating Income: $35,000 - $7,000 - $700 - $650 = $26,650
- 2022 Margin: $26,650 / $35,000 = 76.1%
Discussion: The operating profit margin has consistently increased over the three-year period. This is an excellent sign, demonstrating that the company is not only managing its cost of sales effectively but is also controlling its general operating and marketing expenses as it scales. The company's operational efficiency is improving alongside its sales growth.
3. Net Profit Margin
The net profit margin is the ultimate measure of profitability, showing the percentage of revenue left after all expenses, including taxes and interest, have been deducted. It is calculated as (Net Income / Total Net Sales).
Calculations:
- 2020 Net Income: $16,050 (Operating Income) + $5 (Interest) - $7,000 (Taxes) = $9,055
- 2020 Margin: $9,055 / $22,000 = 41.2%
- 2021 Net Income: $19,350 (Operating Income) + $6 (Interest) - $7,800 (Taxes) = $11,556
- 2021 Margin: $11,556 / $26,000 = 44.4%
- 2022 Net Income: $26,650 (Operating Income) + $10 (Interest) - $8,900 (Taxes) = $17,760
- 2022 Margin: $17,760 / $35,000 = 50.7%
Discussion: The net profit margin has seen significant growth, rising from 41.2% in 2020 to 50.7% in 2022. This demonstrates a very strong and improving ability to convert revenue into actual profit for shareholders. The company's overall financial health is robust, as improvements in efficiency are evident at every level of the income statement.
Recommendations
- Maintain Cost Management: The company's ability to increase its gross profit margin is a key strength. It should continue to focus on optimizing supplier relationships and production processes to maintain this positive trend.
- Scale Operating Expenses Prudently: While operating expenses are currently well-managed, the company must ensure they continue to grow at a slower rate than revenue. As the business expands, it is critical to avoid unnecessary overhead that could erode the strong operating margin.
- Leverage High Profitability for Growth: The excellent and growing net profit margin provides a strong foundation for reinvestment. The company should consider using these profits to fund strategic initiatives such as marketing campaigns to accelerate sales, research and development for new products, or expansion into new markets.
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| Model: |
gemini-2.5-pro |
| Temperature: |
0.2 |
| Max output tokens: |
8192 |
| TopK: |
40.0 |
| TopP: |
0.95 |
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