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6-1 Draft Ratio Analysis Report...

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Peyton Approved Ratio Analysis Report

Michael S. Bittner Southern New Hampshire University ACC 307 Intermediate Accounting I Professor Randy McKinzie June 5, 2020

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Peyton Approved Ratio Analysis Report The primary goal of ratio analysis is to determine the profitability of a company. Wahlen et al. (2017) describes ratios as “…relationships between and among items on financial statements. They are useful indicators of financial position and performance, serving as metrics to evaluate a company's results over time and against its competitors”. This analysis report will use historical ratios from 2015 – 2017 to draw a comparison from one year to another. Additionally, the report includes the industry standard to identify comparable trends. When evaluating the operational and financial performance of Peyton Approved’s fiscal year 2017, this report focuses on the Quick Ratio, Gross Margin, Net Margin, and Return on Equity ratios. The gross margin and net margin are both below the industry standard these categories both ticked up slightly from 2016. The quick ratio and return on equity exceeded the industry standard and indicate solid financial performance. The calculated ratios for each category indicate Peyton Approved is a convincingly strong and financially healthy business. The following details the explanation and figures utilized to compute the ratio for each category. The quick ratio was determined by dividing liquid assets by current liabilities. Liquid assets are cash and other assets that a company can expect to convert into cash quickly. The quick ratio formula does not include inventory, supplies and pre-paid expenses but they may not be quickly converted into cash. The figures used to determine the quick ratio was $95,114.72 liquid assets / $51,593.75 current liabilities. This resulted in a quick ratio of 1.84 for 2017, which indicates near-term financial security or the ability to cover shortterm debt obligations. The gross margin measures company profitability by dividing gross profit from total revenue. The figures used to determine the gross margin was $217,715.00 gross profit / $370,875.00 total revenue. This resulted in a gross margin ratio of .59 for 2017, which

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indicates management processes in-place are effective in controlling costs of goods. The net margin is a percentage of net income divided by total revenue. The figures used to calculate net margin was $83,642.39 net income / $370,875.00 total revenue. The resulted in a net margin of . 23. This indicates for every $1 of revenue Peyton Approved earns, $0.23 translates into net income. Return on common equity measures the profitability of the company relative to the amount of equity capital invested by the common shareholders (Wahlen et al. 2017). Return on equity is calculated by dividing net income by shareholder’s equity. The figures used to calculate return on equity was $83,642.39 net income / $93,642.39 shareholder’s equity. The resulted in a return on equity ratio of .89. This is phenomenal rate of return that would draw-in potential investors. Comparison Ratios:

Quick Ratio

2017 1.84

2016 2.2

2015 2.8

Industry Standard 1.75

Gross Margin Net Margin Return on Equity

0.59 0.23 0.89

0.55 0.22 0.9

0.7 0.32 0.78

0.7 0.24 0.8

Peyton Approved’s quick ratio substantially decreased in 2017 as compared to 2016 ratio of 2.2. This ratio indicates the amount of current assets to cover their existing near-term debut. The reduction in the ratio from 2016 indicates management has taken necessary action to reduce its liquid assets in a positive manner such as investments or company growth projects. The gross margin ratio has marginally improved over the 2016 ratio of 0.55 but it is still below the 0.7 industry standard. This indicates the company has improved it control over COGS, however there is room for improvement. The COGS is somewhat offset by the performance in net margin. Finally, the return on equity has been relatively consistent over the past three reporting periods.

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With the last two years higher than the industry standard potential investors could see that the company is efficiently utilizing investment funds and turn them into profit. The ratios analyzed provide a statistical view into the financial health and operational stability of Peyton Approved. The details show there is room for improvement in the Quick Ratio, Gross Margin, and Net Margin categories. Although the quick ratio far exceeds the industry standard the company needs to review prospects for utilizing excess current assets to bring down that ratio. Additionally, the ratios for gross margin and net margin are below the industry standard and will need to be evaluated for improvements to increase them to be more equal to industry standards. The completed analysis determined Peyton Approved is a strong healthy business.

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