Ratio analysis assignment doc

Running head: PEYTON APPROVED: FINANCIAL RATIO ANALYSIS Peyton Approved: Financial Ratio Analysis Author’s Name Institutional Affiliation 1 PEYTON APPROVED: FINANCIAL RATIO ANALYSIS 2 Peyton Approved: Financial Ratio Analysis Abstract The financial analysis uses accounting ratios to determine the major aspects of a firm. These ratios include but not limited to profitability and liquidity ratios. Profitability ratios are used by investors and financial analysts to determine the and evaluate the ability of a firm to generate profits in relation to firms balance sheet assets, revenue, shareholders equity and operating costs during a specified period of time. They analyses how well a firm uses its assets to produce revenue and value shareholders. On the other hand, liquidity ratios examine the financial health of a firm. They are important as they determine whether the firm is able its short term debts when they become due (Eljelly, 2004). They are focused on current liabilities as liquidity is about daily expenses and incomes. Therefore the financial analysis here focuses on determining the position of Peyton Approved in the industry showing its strengths, weakness, and recommendations for improvement. Computations Profitability ratios Gross margin ratio The ratio is used to determine and assess the profitability of the firms manufacturing activities. It represents the portion of each dollar the firm retains (Bragg, 2007). Gross margin ═ (Total revenue – Cost of goods sold) ÷ Total revenue ═ (370875 – (137400 + 15760)) ÷ 370875 ═ 0. 58 PEYTON APPROVED: FINANCIAL RATIO ANALYSIS 3 Therefore, this means that for every dollar generated, 0.58 of it would be used to pay back expenses interest taxes, etc. while the remaining 0.42 would go into the cost of goods sold. Net margin ratio It is a profitability ratio that determines the amount of net income earned with each dollar of sales generated by comparing the net income and net sales of a company. It shows the percentage of sales left after deducting all expenses of the business (Wahlen et al., 2017). Net margin ═ (Revenue – cost of goods sold – operating expenses – interest) ÷ Revenue ═ (370875 – 153160 – 134072.61 – 1473.75) ÷ 370875 ═ 0.22 Return on sales ratio The ratio shows the proportion of profits generated from sales. It evaluates the company’s operational efficiency as well as profitability. It shows the percentage of profits generated from a dollar of sales. Return on sale = Operating profit ÷ Net sales = 83642.39 ÷ 370875 = 0.23 With 1 dollar of sales, the firm generates 0.23 of the dollar as profit. Return on equity ratio It is a profitability ratio that helps to determine and evaluate a firm’s ability to use shareholders equity to generate profits. The ratio shows amount of profits generated by each dollar of common stockholders’ equity (Williams & Dobelman, 2017). Return on equity = Net income ÷ shareholders’ equity = 83642.39 ÷ 93637.39 PEYTON APPROVED: FINANCIAL RATIO ANALYSIS 4 = 0.89 The figure shows that, for every dollar of shareholders equity invested, it generated 0.89 of a dollar in return. Liquidity ratios Quick/acid test ratio It is a liquidity ratio used to determine the firm’s ability to meet financial obligations when they fall due. Quick ratio = (Current assets − Inventory − prepaid expenses) ÷ Current liabilities = (147579 - (25750 + 27850) – (7500 + 400)) ÷ 51598.75 ═ 1.67 The proportion exceeds 1 which means the firm is able to pay off its current liabilities and still remain with some quick assets. Comparisons The gross margin ratio of the firm is lower than the industry’s recommended ratio. Higher gross ratios are more favorable as they mean the firm to be selling its inventory more profitably. In the year 2015, the firm had attained the recommended proportion but fell to 0.55 in the year 2016. In year 2017, there was a slight improvement as it increased to 0.59. Therefore, the firm’s manufacturing activities are becoming less profitable. They are below the standards of the industry. From the return on sales ratio, the proportion is gradually decreasing as in year 2015 it was 0.26, in year 2016 it was 0.24, and currently at 0.23 in year 2017. Higher return on sales proportion are preferred as the figure shows the proportion of profits generated from a given level of sales. The firm has attained the standard ratio in the industry of 0.23. PEYTON APPROVED: FINANCIAL RATIO ANALYSIS 5 From the return on equity ratio, the firm has been able to meet the industry standard of 0.8.