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Susie's Cakes by Design: Financial/Ratio Analysis and Commentary

Given the following financial information (balance sheet, income statement, and historical and industry averages), analyze the company's overall financial situation. Base your analysis on these financial statements and financial ratios.

1. Calculate 13 financial ratios as follows:
Profitability Ratios (3 ratios)
Asset Utilization Ratios (5 ratios)
Liquidity Ratios (2 ratios)
Debt Utilization Ratios (3 ratios)

2. Write a narrative of one or two paragraphs on your assessment of the company's ratios compared to industry averages.

Susie's Cakes by Design
Balance Sheet
December 31, 2007

Assets

Current Assets:
Cash 200,000
Marketable Securities 50,000
Accounts Receivable 800,000
Inventories 950,000
Total Current Assets 2,000,000
Gross Fixed Assets at Cost 12,000,000
Less Accumulated Depreciation 3,000,000
Net Fixed Assets 9,000,000
Other Assets 1,000,000
Total Assets 12,000,000

Liabilities and Stockholder's Equity

Current Liabilities:
Accounts Payable 900,000
Notes Payable 200,000
Accruals 100,000
Total Current Liabilities 1,200,000
Long term debt including financial leases 3,000,000
Stockholder's Equity:
Preferred Stock (25,000 shares, $2 dividend) 1,000,000
Common Stock (200,000 shares @ $3 par) 600,000
Excess Paid in Capital 5,200,000
Retained Earnings 1,000,000
Total Stockholder's Equity 7,800,000
Total Liabilities and Stockholder's Equity 12,000,000
Susie's Cakes by Design
Income Statement
Year Ending December 31, 2007

Sales Revenue 10,000,000
Less: Cost of Goods Sold 7,500,000
Gross Profit 2,500,000
Less: Operating Expenses
Selling Expenses 300,000
G & A Expenses 650,000
Lease Expense 50,000
Depreciation Expense 200,000
Total Operating Expenses 1,200,000
Operating Profit 1,300,000
Less Interest Expense 200,000
Net Profit Before Taxes 1,100,000
Less: Taxes (40%) 440,000
Net Income 660,000

Preferred Stock Dividends Paid 50,000
Total Earnings Available to Common Stockholders 610,000

Historical and Industry Averages
Ratios Actual 2006 Actual 2007 Industry Avg

Net Working Capital 760,000 720,000 1,600,000
Current Ratio 1.40 1.55 1.85
Quick Ration .92 1.05 1.28
Inventory Turnover 9.52 9.21 8.60
Average Collection Period 45.0 days 36.4 days 35 days
Average Payment Period 58.5 days 60.8 days 45.8 days
Debt-Equity Ratio .25 .27 .39
Times Interest Earned Ratio 8.2 7.3 8.0
Gross Profit Margin .30 .27 .25
Operating Profit Margin .12 .12 .10
Net Profit Margin .067 .067 .058
Return on Total Assets .049 .054 .043
Return on Equity .066 .073 .072
Earnings Per Share 1.75 2.20 1.50.

Solution Preview

See the attachment.

Financial analysis:

The current ratio of the company for the financial year 2007 is 1.66 which shows there is improvement in the liquidity position of the company compared to previous year. However, the current ratio is lesser than the industry average of 1.85.

The quick ratio of the company is .875 which is lesser than the quick ratio of previous financial year and also it is lesser than the industry average of 1.28 which means the company has low short term solvency and huge stock of inventory. The company needs to improve its quick ratio.

Average collection period of the company for the year 2007 is 29.2 days which is lesser than the average collection period of previous years and also of the ...

Solution Summary

Susie's Cakes by Design is discussed and the financial/ratio analysis and commentary is provided.

$2.19