Intro to Quantitative Principles
Dr. Harrison Green
October 27, 2010
Lemonade Stand Economic Summary Report
|BALANCE SHEET | | |Season 1 |Season 2 |Season 3 | |Profitability Measures | | | | | ROA |69.7% |47.9% |31.6% | | ROE |77.2% |53.6% |33.0% | | Profit Margin |61.4% |68.0% |68.0% | | | | | | |Asset Management | | | | | Inventory Turnover |16.41 |10.61 |10.67 | | Asset Turnover |1.134 |0.703 |0.464 | | | | | | |Liquidity Measures | | | | | Current Ratio |9.12 |8.16 |21.97 | | Cash Ratio |8.84 |8.67 |21.65 | | | | | | |Financial Leverage | | | | | Debt-Equity Ratio |0.107 |0.119 |0.046 | | | | | | |Growth Ratios | | | | | Retention Ratio |1.00 |1.00 |1.00 | | Internal Growth Rate |230.1% |91.8% |46.1% | | Sustainable Growth Rate |337.9% |115.3% |49.2% |
Analysis of the Financial Report
The profit margin for Season 2 increased 6.6% percent from Season 1 to 68.0% which means that for every dollar in sales, 68.0 cents of profit is realized. It is interesting that the profit margin remained at 68.0% for Season 3 even though sales were down. This can be partially attributed to well managed inventory during Season 3. Profitability measures of ROA and ROE steadily decreased each season. This means that both total assets and total equity increased by larger amounts each season than net income. This is a sign that increased revenues are needed to improve the company’s financial position. The businesses’ managing of assets was less efficient in Season 2 as indicative by significant decreases in the inventory and asset turnover ratios. Inventory turnover decreased from 16.41 to 10.61. However, inventory turnover remained nearly constant from Season 2 to Season 3. The asset turnover indicates that for every $1 in assets, $.70 in sales were generated – down from $1.13 in Season 2. Season 3 numbers were even more dismal at $.46 in sales per $1 in assets. These numbers can be improved by controlling costs more effectively and by increasing sales. Company liquidity, which was relatively constant for the first two seasons, increased significantly during Season 3 as a result of a substantial increase in cash assets with a significant decrease in liabilities. This is reflected in both the current ratio and the cash ratio. The numbers reflect that the Lemonade Stand currently can claim that it has $21.97 in current assets...