C251 Task 1 Yellow Leaf Fashion PDF

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Running head: YELLOW LEAF FASHION

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Yellow Leaf Fashion Financial Analysis Samantha Faulk 001199904 Western Governors University

YELLOW LEAF FASHION 2 Yellow Leaf Fashion Financial Analysis Ratios Ratios are a useful tool for analyzing a company’s performance. Ratios can be used to compare trends and changes for a single company from year to year but are more commonly used to compare different companies. By calculating a ratio between two or more accounts, the amount in these accounts is less important, allowing a company to compare its financials to another company within its industry, regardless of size. Each type of ratio has a specific benchmark that shows a favorable ratio. Liquidity Current Ratio. The current ratio is calculated by dividing current assets by current liabilities. A desired ratio is above 2.0. Yellow Leaf Fashion has a current ratio of 4.83, indicating that the company has vastly more current assets than current liabilities. This ratio indicates a strong financial standing for the company. Quick Ratio. By adding cash, short-term investments and net receivables then dividing the sum by current liabilities, the quick or acid-test ratio is computed. This ratio should show at least one dollar of quick assets per dollar of liabilities to be considered advantageous. This ratio explains a company’s ability to pay its current liabilities with cash and cash equivalents. With a ratio of 3.88, Yellow Leaf Fashion should be able to easily pay off debts with its cash and cash equivalents, indicating a strong financial position. Activity Accounts Receivable Turnover. Calculated by dividing net sales by average net receivables, the accounts receivable turnover shows how many times its account receivable is replaced in a year by customers paying for merchandise. The accounts receivable turnover for Yellow Leaf Fashion is 2.87, which is below typically desired rates of 5-10 in most industries. This lower ratio suggests that customers are not paying in a timely manner or are not paying at all, as shown by the 4% allowance for uncollectable accounts.

YELLOW LEAF FASHION 3 Inventory Turnover. Inventory turnover is calculated by dividing cost of goods sold by the average inventory, which shows how many times the average level of inventory is sold and replaced within a year. Yellow Leaf Fashion has an inventory turnover rate of 1.52, which is considered low. This low ratio can be caused by a number of factors but indicates that the company has a low number of overall sales in comparison to the inventory on hand. Profitability Profit Margin on Sales. This ratio is computed as net income divided by sales. This ratio shows how much profit is made on each sale. Yellow Leaf Fashion has a profit margin of .28 or 28%. This is a generally accepted profit margin that indicates financial health for the company. Earnings per Share. By dividing net income by weighted average number of shares outstanding, the earnings per share can be calculated. Yellow Leaf Fashion has an earnings per share of $9.31, indicating good financial strength. The higher earnings per share, the more valuable the company’s stock is. Coverage Debt to Assets Ratio. The debt to assets ratio is calculated by dividing total liabilities by total assets. This ratio shows the portion of assets financed with debt. With a ratio of .23, Yellow Leaf Fashion is financially strong, because of the limited amount of debt used to finance its assets. Book Value per Share. By dividing common stockholders’ equity by outstanding shares, the book value per share is calculated. This ratio shows how much each share would receive if the company were to liquidate and distribute the assets at their carrying value. Stockholders of Yellow Leaf Fashion would receive $27.76 in the event of liquidation and distribution. Overall Position Overall, Yellow Leaf Fashion has a good financial standing. Some areas of the company are stronger than others, resulting in a favorable average. Based on the liquidity, profitability, and coverage ratios that have been calculated for the company, it does not heavily rely on debt to finance or continue operations. Because Yellow Leaf Fashion does not heavily rely on debt, it will be able to withstand periods of lower profits and still be successful. The activity ratios that were calculated indicate some weaknesses within the company as well. Both the inventory and accounts receivable indicate a low volume of sales with potential issues with customers timely paying their full bills. These potential issues can lead to a long-term decrease in profitability and success for the company. Improvements Every company can improve their operations and increase their financial strength; Yellow Leaf Fashion is no exception. One improvement that Yellow Leaf Fashion should consider is its inventory turnover rate. The ratio suggests that the company either has too much stagnant inventory or isn’t making enough sales. A good marketing campaign would increase sales and in turn increase the inventory turnover rate. An analysis of which products are selling better than others can guide management to keeping the proper mix of product inventory on hand. By reducing the amount of stagnant inventory, the company can reduce storage costs and increase profits. Another improvement the company should consider is to create stricter policies for the sales on account. These policies can include a shorter payment period, larger late fees, discounts on timely payments, or a combination thereof. By implementing these policies, the allowance for doubtful accounts should decrease and bring more income into the company. Yellow Leaf Fashion, by implementing these improvements, will become financially stronger as a whole.

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YELLOW LEAF FASHION 5 References

Garrison, Noreen, Brewer (2015). Managerial Accounting, Fifteenth Edition. New York: McGraw Hill....