ACC 307 Final Project Part II Template 12-8-21

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Southern New Hampshire University *

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307

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Feb 20, 2024

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ACC 307 Final Project Part II: Ratio Analysis Report Andrew Munoz Southern New Hampshire University

This report examines the year-end financial status of Peyton Approved, a bakery, by analyzing key financial ratios against historical data and industry standards. The analysis reveals a liquidity position that, despite a decline, remains robust, with a Quick Ratio well above industry norms. However, profitability margins indicate a downward trend, with Gross Margin below industry average, suggesting potential cost management or market pricing issues. The Net Margin has stabilized but sits below previous highs, aligning with the industry benchmark. The Return on Equity is strong, reflecting efficient use of equity in profit generation. These metrics collectively narrate a story of a company with solid liquidity and equity performance but facing challenges in profitability that may require strategic operational adjustments. In the fiscal year of 2017, Peyton Approved's financial ratios were computed to gain insight into the bakery's profitability and liquidity. The Quick Ratio came out to 1.84, which, although lower than the previous years' ratios of 2.2 in 2016 and 2.8 in 2015, still stands above the industry standard of 1.75. This suggests that the bakery maintains a good capacity to cover its current liabilities without needing to sell its inventory. The Gross Margin, reflecting the percentage of total sales revenue that the company retains after incurring the direct costs associated with producing the goods it sells, was calculated to be 0.58. This is a slight improvement from 0.55 in 2016 but still below the 0.7 observed in 2015 and the industry standard of 0.7, indicating a potential area for improvement in cost management or pricing strategies. The Net Margin for 2017 was determined to be 0.22, consistent with 2016, and below the 0.32 margin of 2015. Although this remains below the margin achieved in 2015, it matches the industry standard of 0.24, suggesting the bakery's profitability is on par with industry norms. The Return on Equity (ROE) was 0.89 for 2017, a slight decrease from 0.9 in 2016 but still higher

than both the 0.78 of 2015 and the industry standard of 0.8. This indicates that Peyton Approved is using its equity efficiently to generate profits, showing strong financial health from an investor's perspective. Below is the table summarizing the computed financial ratios for Peyton Approved over the past three years, alongside the industry standard for comparison: Comparison Ratios: 2017 2016 2015 Industry Standard Quick Ratio 1.84 2.2 2.8 1.75 Gross Margin 0.58 0.55 0.7 0.7 Net Margin 0.22 0.22 0.32 0.24 Return on Equity 0.89 0.9 0.78 0.8 These figures are crucial in illustrating the company's fiscal trends and overall financial stability. While the bakery is doing well in some areas, such as maintaining a good Quick Ratio and ROE above the industry average, there is a noted decline in profitability ratios, which warrants a strategic review. In comparing Peyton Approved's financial ratios from 2015 to 2017 with the industry standards, several trends and deviations become apparent, providing insights into the company's financial trajectory and position within the industry. The Quick Ratio has experienced a downward trend, decreasing from 2.8 in 2015 to 2.2 in 2016, and further to 1.84 in 2017. Despite this decline, the bakery's quick ratio remained above the industry standard of 1.75 throughout this period, indicating a consistent capacity to cover short-term liabilities with its most liquid assets. This suggests that Peyton Approved has maintained a relatively stable liquidity position, even though there is a noticeable decrease which could warrant a closer review of working capital management.

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Peyton Approved's Gross Margin shows a fluctuation over the three years. After a decline from 0.7 in 2015 to 0.55 in 2016, there was a rebound to 0.58 in 2017. This recovery is a positive sign; however, the company's gross margin still falls below the 2015 level and the industry standard of 0.7, hinting at increased costs of goods sold or potential pricing pressure within the market that could be squeezing the bakery's profitability. The Net Margin remained stable at 0.22 in both 2016 and 2017, a drop from the 0.32 observed in 2015. While these figures are below the bakery's own past performance, they align closely with the industry standard of 0.24, indicating that Peyton Approved's profitability is in line with industry norms despite the decline from 2015. Lastly, the Return on Equity (ROE) presents a positive aspect of Peyton Approved's financial health. The ROE slightly decreased from 0.9 in 2016 to 0.89 in 2017 but showed an overall increase from 0.78 in 2015. Notably, the bakery's ROE consistently outperformed the industry average of 0.8 over these years, suggesting effective utilization of shareholders' equity in generating profits. These figures underscore a company that, while facing challenges in maintaining its profitability margins, continues to demonstrate strong liquidity and above-average returns on equity. The consistency in net margin with the industry also shows competitiveness, although the reduced gross margin could be a concern for future profitability if the trend continues. It would be prudent for Peyton Approved to delve into the underlying factors causing these shifts, such as changes in cost structure or sales mix, to pinpoint areas for strategic improvement. The financial analysis of Peyton Approved for the years 2015 to 2017 indicates a company that has managed to maintain a strong liquidity position and a commendable Return on Equity, which surpasses industry averages. The Quick Ratio, although on a downward trajectory,

suggests a healthy ability to meet short-term obligations. However, the Gross Margin's fall below the industry standard and the decline from the 2015 peak point to potential inefficiencies in cost control or pricing strategies that need to be addressed. The Net Margin, while stable in the last two years, indicates a drop in overall profitability since 2015, yet it remains consistent with industry performance. The bakery's ability to sustain an ROE above industry averages is a positive sign, showcasing a potentially effective strategy in equity utilization despite the observed challenges in profitability. In light of these findings, Peyton Approved is advised to investigate the underlying factors affecting its cost of goods sold and pricing models to enhance profitability. The stable Net Margin suggests that while profitability is at par with the industry, there is room for improvement to return to earlier levels of performance. The consistent ROE underscores the company's capacity to generate shareholder value, which could be leveraged for future growth and operational improvements. Overall, Peyton Approved shows financial resilience, but proactive measures should be considered to bolster profitability and sustain its competitive edge.

References Wahlen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate accounting: Reporting and analysis (2nd ed.). Boston, MA: Cengage Learning.

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