Ratio Analysis Memo

Topics: Revenue, Financial ratios, Generally Accepted Accounting Principles Pages: 5 (1100 words) Published: April 16, 2014


Kudler CEO Financial Memo
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Kudler CEO Financial 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%...
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