Ratio Analysis Memo
Ratio Analysis Memo
The liquidity, profitability, and solvency ratios reveal some interesting points about Kudler Fine Food’s financial position. The liquidity ratios revealed that during 2002 and 2003, Kudler was having no trouble paying short-term debt. However, the current and acid-test (quick) ratios showed that during 2003 Kudler had an excess amount of cash that they were not investing properly. These ratios also showed that Kudler was collecting receivables and selling average inventory very quickly. The profitability ratios revealed that during 2002 and 2003, Kudler was using assets efficiently and making a decent profit. The profit margin ratio showed that during 2002 Kudler made a profit of four cents per dollar, and during 2003 they made a profit of roughly six cents per dollar. In addition, the return on assets ratio (which is also a profitability ratio) showed that Kudler utilized their assets efficiently enough to turn a profit. The solvency ratio used, which was the debt to total assets ratio, showed that during 2002 and 2003 Kudler only had around a quarter of their assets financed in debt. All of these ratios show that Kudler was a fairly strong company financially during 2002 and 2003. When trying to figure out how successful Kudler Fine Foods is, it is critical to review all financial statements. By using the horizontal and vertical analysis and the determining ratio calculations the profitability, liquidity, and solvency are figured. A specific ratio analysis may intrigue a particular customer. Lenders or suppliers would be interested in the liquidity ratio because the company’s likelihood to pay off short-term debt is obvious.
The profit of the company determines the potential impending success and would be important to creditors and investors. The solvency ratios show if the company will continue to grow and stockholders or financial analysts would be interested in these ratios. Asset Turnover is the amount of sales or revenues produced per dollar of assets. The Asset Turnover ratio is a gauge of the productivity in which a company is using its assets. The number of times is calculated by the net sales divided by the average assets. Usually, the higher the ratio, the better it is, since it implies the company is generating more revenues per dollar of assets (“Investopedia”, 2014). The asset turnover ratio tends to be higher for companies in a sector like consumer staples, which has a relatively small asset base but high sales volume. On the other hand, companies in areas like utilities and broadcastings, which have large asset bases, will have lower asset turnover. Kudler Fine Foods asset turnover ratio shows that from 2002 to 2003 there was not much of an increase. However, the percent does improve at a .3% increase from year to year. A profit margin is a ratio of profitability calculated as net income divided by revenues, or net profits divided by sales (“Investopedia”, 2014). It measures how much out of every dollar of sales a company actually keeps in earnings.
Profit margin is valuable when reviewing companies in comparable trades. A higher profit margin shows a more profitable company that has a healthier govern over its costs compared to its competition. Profit margin is shown as a percentage. Therefore, for instance, a 20% profit margin means the company has a net income of $0.20 for each dollar of sales. Looking at the earnings of a company does not always convey the whole story. Increased earnings are noble, but an increase does not mean that the profit margin of a business is getting better. For example, if a corporation has costs that have gotten larger faster than sales, it indicates a lower profit margin. This leads to the fact that costs need to be policed better. Kudler Fine Foods has a net income of $465,573 from sales of $11,698,828, giving it a profit margin of 4.0% ($465,573/$11,698,828). The next year net income rises to $676,795 on sales of $10,796,200, the company’s profit margin raise to 6.3%. So while the company increased its net income, it has done so with diminishing profit margins.
This is said because the return on assets ratio is low. When it is low the company uses less money on more investment. The profit margin is low as well calculated at only .6% showing that Kudler Foods had a low profit at that reporting time. The debt to total assets ratio was .28%, which showed the company is healthy. The times interest earned ratio was 9.8%, which backs up claims of financial health. The solvency ratio shows Kudler Foods can pay back long-term obligations. Each ratio has different users interest in mind. Return on common stockholder’s equity is defined as Net Income / Total Capital, and Return on Common Stockholders’ Equity: 676,795 / 1,928,960 = 35.09% Return. Here is a comparison of this (2003) information to the same information from last years’ (2002) records to begin to determine a trend. Profit Margin (2002), $647,645 / $10,644,800 = 6.08 % Margin Return on Assets (2002), $2,675,250 / $10,796,200 = 24.78% Return Asset Turnover (2002) $10,644,800 / $2,271,400 = 4.69 Times Return on Common Stockholders’ Equity (2002) $647,645 / $1,928,960 = 33.58% Return 2002 Year 2003 Year Profit Margin 6.08% Margin 6.27% Margin Return on Assets 24.78% Return 25.3% Return Asset Turnover 4.69 Times 4.04 Times Stockholder’s Equity 33.58% Return 35.09% Return The information that was examined indicates that Kudler Foods is doing well and if the company continues on its current path, profits will continue to grow, as long as other economic conditions stay the same.
We conducted a vertical analysis of the balance sheet and income statement and found that these figures indicated that the company is strong, and there were not any negative figures, which is always a good sign. Some of the numbers were low, but that also was a good indicator, as the low numbers were the relationship between the expenses against the net sales. This indicates that there were more than enough sales to cover the expenses. We also found that when comparing the net sales against the net profits, the percentage was a bit low, but still within a strong range. Overall Kudler Foods is a strong business that will continue to grow as it is managed carefully and changes are made when necessary to adjust to the market itself.
CURRENT ASSETS/CURRENT LIABILITIES
2002: 2,102,631/977,188 = 2.14:1
2003: 1,971,000/116,290 = 16.95:1
CASH + SHORT-TERM INVESTMENTS + RECEIVABLES (NET)/CURRENT LIABILITIES:
1 2002: 89,016 + 1,131,213 + 196,503/977,188 = 1.45:1
2003: 1,430,000 + 86,000/116,290 = 13:1
NET CREDIT SALES/AVERAGE NET RECEIVABLES = X TIMES
2002: 10,107,787/185,907 = 54.4 Times = Every 7 Days
2003: 10,796,200/141,251 = 76.4 Times = Every 5 Days
COST OF GOODS SOLD/AVERAGE INVENTORY = X TIMES
2002: 7,543,054/355,534 = 21 Times = Every 17 Days
2003: 8,474,831/401,634 = 21 Times = Every 17 Days
NET SALES/AVERAGE ASSETS = X TIMES
2002: 11,698,828/4,793,146 = 2.4 Times
2003: 10,796,200/3,984,733 = 2.7 Times
NET INCOME/NET SALES = X%
2002: 465,573/11,698,828 = 4.0%
2003: 676,795/10,796,200 = 6.3%
Return on Assets
NET INCOME/AVERAGE ASSETS = X%
2002: 465,573/4,793,146 = 9.7%
2003: 676,795/3,984,733 = 17.0%
Return on Common Stockholders’ Equity
NET INCOME – PREFERRED DIVIDENDS/AVERAGE COMMON STOCKHOLDERS’ EQUITY = X% 2002:
465,573 – 0/3,396,887 = 13.7%
2003: 676,795 – 0/2,274,380 = 29.8%
Debt to Total Assets
TOTAL DEBT/TOTAL ASSETS = X%
2002: 1,491,747/5,294,216 = 28.2%
2003: 746,290/2,675,250 = 27.9%