ACC 307 Final Project Analysis Report

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

Financial ratios can be used to determine how well a business is performing not only in comparison to past years, but also if it in line with the current economy and market. The purpose of this analysis report is to determine how well Peyton Baking performed for the year 2017 through a series of financial ratios. The ratios included in this report, quick ratio, gross margin, net margin, and return on equity, will be compared to the previous years, 2016 and 2015, as well as the industry standards. Through this analysis report, Peyton Baking will be able to present that financially the company has increased performance in all areas, with some room for improvement for future years. Comparison Ratios: 2017 2016 2015 Industry Standard Quick Ratio 1.84 2.20 2.80 1.75 Gross Margin 0.59 0.55 0.70 0.70 Net Margin 0.23 0.22 0.32 0.24 Return on Equity 1.35 0.90 0.78 0.80 The purpose of including comparison ratios is to gain a better understanding of the financial stability of a company in both present and past performances (Bloomenthal, 2023). The first ratio computed was the quick ratio, which helps determine if a company has the liquidity or cash to pay any long-term obligations/debts; is calculated by taking the quick assets divided by the current liabilities (Wahlen, Jones & Pagach, 2017). “The quick ratio includes the quick assets that can be converted into cash within 90 days (typically including cash and cash equivalents, short-term investment securities, and receivable). Inventories are excluded because their ability to be sold quickly is uncertain, and they frequently are sold on credit. Prepaid items are excluded

because they are not convertible into cash.” (Wahlen, Jones & Pagach, 2017). The liquid assets for Payton Baking amounted to $95,114.72, and the current liabilities amount to $51.593.75. This resulted in a quick ratio of 1.84 for 2017. Since this ratio is positive, Peyton Baking is able to report financial stability to have enough liquidity in their quick assets to be able to complete any future obligations and debts. The gross profit margin “indicated a company’s ability to generate revenues and control the costs of producing and delivering its products and services” (Wahlen, Jones & Pagach, 2017). The gross margin is calculated by subtracting cost of goods sold from net sales, then dividing by the net sales. Total revenue amounted to $370,875, which included bakery sales and merchandise sales. Total cost of goods sold amounted to $153,160, which includes merchandise of goods sold (FIFO) and baking cost of goods sold. The gross profit for Peyton Baking amount to $217,715 for 2017. The gross margin ratio reported 0.59 for the year 2017. A good indicator for this ratio is a positive ratio, as well as an increase from the previous years. The net profit margin ratio “is the bottom-line proportion of profit per dollar of total revenues” (Wahlen, Jones & Pagach, 2017). The net profit margin ratio is calculated dividing the net income by revenue. Total revenue for 2017 amounted to $370,875.00. This included bakery sales and merchandise sales. Net income amounted to $83,642.39, which is calculated by taking totaling operating expenses reporting $134,072.61 subtracted from gross profit of $217,715.00. For 2017, Peyton Baking reported a net profit margin ratio of 0.23. This ratio helps businesses determine how much of earnings is actually reported as income at year end. Per this ratio, the company is able to report a positive ratio, meaning true earnings are higher than expenses for the year.

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The return on equity ratio “shows how many dollars of net income were earned for every dollar invested by the owners” (Wahlen, Jones & Pagach, 2017). This ratio is calculated by dividing net income by the average shareholder’s equity. Net income amounted to $83,642.39, which is calculated by taking total operating expenses of $134,072.61, subtracted from gross profit of $217,715.00. The average shareholder’s equity amounted to $61.821.20, which includes common stock reporting $30,000.00 and retained earnings reporting $63,642.39. The return on equity ratio for 2017 reported 1.35 for the year. A comparison from current financial ratios to previous years and the current industry standards, can help businesses to determine areas of improvement and areas the company is excelling in. Firstly, the quick ratio for 2017, 1.84, is a decrease from the previous year’s 2.20 reported ratio. However, the industry standard reported 1.75, therefore the company is 0.09 over the industry standard despite their decline from previous year. Per this comparison, the Peyton Baking Company can safely report that they have enough assets, but may need to consider ways to utilize those assets to generate more income. The gross margin ratio comparison reported that per the industry standard of 0.70 to 2017 of 0.59, there is a 0.11 negative difference. In 2015, the gross margin ratio reported a matching 0.70 to the industry standard, but the company can safely report that this is improving due to the 0.04 positive change from 2016 to 2017. Since this ratio is below the industry standard, further review needs to be done to determine how to either increase the profit of bakery or merchandise sales or decrease the costs of goods sold, in order to maintain a higher ratio, one that is closer to the industry standard of 0.70. The net margin comparison allows a company to understand how much they are truly earning per each reported dollar made. The 0.23 ratio reported for 2017, means that per every

$1.00 made, Peyton Baking Company was able to safely report earning $0.23. Additionally, the company reported a 0.01 increase from 2016 to 2017. Per the industry standard ratio of 0.24, Peyton Baking is only .01 off from being right on target. The return on shareholder’s equity for 2017 reported 1.35, which is a 0.45 increase from the 2016’s reported 0.90. The industry standard reported 0.80, which is 0.45 off from the current reported ratio. It appears that a positive trend is occurring for this ratio from previous years. Upon reviewing all ratios, Peyton Baking is performing at what is consider “normally” financially, but still has room for improvement in order to remain profitable for the future. Each ratio has its own areas of concerns that Peyton Baking Company needs to further investigate in order to continue to improve future years ratios. The quick ratio is significantly off from the industry standard ratio. The company needs to determine ways to use their current assets in order to generate more revenue for the company to decrease the excessive margin. The gross margin is also significantly off from the industry standard. The company needs to determine that even though an increase reported from 2016 to 2017, the excessive margin between 2017 and industry standard indicates that the company could potentially be missing out on ways to generate income after expensing cost of goods sold. The net margin ratio is considerably the closest ratio reported for 2017 to the industry standard. Although Peyton Baking seems to be just off on this ratio, the company should always evaluate ways to increase their earnings per each $1.00 made. Lastly, the return on equity ratio is above from the industry standard, the company should still evaluate ways to maintain a positive ratio as this helps determine how efficiently the company is able to generate profits from its current equities.

References Bloomenthal, A. (2023, March 17). Financial Ratio Analysis: Definition, types, examples, and how to use . Investopedia. https://www.investopedia.com/terms/r/ratioanalysis.asp 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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