Financial Ratio Analysis of a Small Bakery
Financial Ratio Analysis of a Small Bakery
Profit margin
Profit margin calculates the extent to which an organization generates capital, primarily by finding the quotient between income and revenues and then converted into a percentage. Profit margins show how many cents of profit the business has generated for each dollar of sale. Profit margins are utilized by investors, business people, and creditors to indicate the company’s financial standing, growth potential, and management skills (Alexander, 2013).
Profit margin is calculated as
Net Profit Margin = (Revenue – cost)/Revenue*100%
For 2019 will be
$120,000-$65,000/$120,000*100
=55,000/120000*100
= 45.83%
For 2018 will be
$95,000-$47,500/$95,000*100
=47,500/95,000*100
= 0.5*100
=50%
Return on owner’s capital
Return on individual capital estimates the profit earned from a business, and primarily for contributors such as bondholders and stockholders. Return on total capital indicates how important a company is at turning money into profits.
Return on owner’s capital/ return on total capital is calculated as
Return on owner’s capital= {(Net Income-Dividends)/ (Debt+ Equity)} *100
For 2019 will be
Net income = (sales-cost of sales-other expenses)
$(120,000-65,000-29500)
=$25,500
Equity= total assets-total liabilities
=$(45,000+85,000+79,000+25375)- $(13,600+32000+25375)
=$163,400
Debt = account payable+ non-current liabilities+ overdraft
=$(13,600+32000+25375
=$70,975
Therefore, return on owner’s capital is
=25,500/ (163,400+70,975) ×100 to convert into percentage
= (25,500÷234,375)100
=10.90%
For 2018 will be
Return on owner’s capital=net income divided by the sum of equity and debt
Net income = (sales – cost of sales – other expenses)
=$(95000-47500-20800)
=$26,700
Equity= total assets-total liabilities
=${(36,500+29,000+35600+19500) -(15,450)}
=$105,150
Debt =account payable +non-current liabilities
=$15,450
Therefore, return on owner’s capital
= Net income divided by the sum of equity and debt
= {26,700÷ (105150+15450)} ×100
= (26,700÷120,600) *100
=22.10%
Current ratio
The current ratio is a moderate metric used in investment to analyze the short-term cash flow compared to its available benefits and recurring accountability. The current balance reflects its ability to give rise to enough cash to pay off all its debts once the dateline approaches. In the world of business marketing current ratio is used to measure the financial healthiness of a business; for example, a current balance between 1.5 to 3 is seen as healthy, while a ratio value below one may indicate a liquidity problem for the organization.
Current ratio=current assets/current liabilities
For 2019
Current ratio= (inventory + accounts receivable + cash equivalent +cash) ⁄ accruals + accounts payable + notes payable
= (45,000+85,000+25,375)/ 13,600+29500
=155,375/43100
=3.6
For 2018
= (36,500+29,000+19,500)/15450+20,800
= 85,000/36,250
=2.3
Quick ratio
The quick ratio demonstrates a company’s short-term ability to utilize its immediate cash assets like cash to clear out its current liabilities. The quick ratio is also called the acid teas ratio (Johri & Maheshwari, 2015). It is a more conservative measure than the current ratio, which entails all the existing assets as coverage for existing liabilities.
Quick ratio= (marketable securities + accounts receivable + cash &equivalent)/Current liabilities
For 2019
= 25,375+85000+45000/13600
Quick ratio is = 11.4
For 2018
=19500+29000+36500/15450
Quick ratio is =5.5
Inventory turnover
In accounting, inventory turnover indicates the number of times a company sells and replaces its stock of goods during a specified period. The inventory is calculated by dividing the cost of goods sold by the average list at the selling price.
Inventory Turnover= Net Sales/Average Inventory at selling price; in other words, Inventory Turnover is calculated by dividing the cost of goods sold by average inventory
For 12/31/2019
Inventory turnover =65,000/45,00
=1.4
For 12/31/2018
Inventory turnover=47,500/36,500
=1.3
The financial stability and health of the small bakery solemnly depend on liquidity, profitability, solvency, and operating efficiency. These are the vital areas of concern to stabilize the small bakery business and work together. When the values of these ratios are compared to the previous financial years with other small bakeries that have existed for a while, you realize their usefulness. These ratios will also help implement plans to improve profitability, liquidity and gearing strategies, and market value for the small bakery.
Financial analysis report
The profit margin plays a significant role in determining business profitability within a given particular time. For instance, the profit margin for the financial year 2018 is 50%, and that of the financial year 2019 is 45.83%. Referring to the two financial years, we can confidently argue that the business is a healthy profit-oriented business because of the kind of profit margins generated (Alexander, 2013). I can, therefore, give directions to the small bakery owner to move on with the plans of starting the bakery because he will be able to make an average profit while still maintaining and meeting other financial expenses. Profit margin is essential because it helps us compare and compare the year-to-year performance and highlights the weaknesses when it is calculated. A higher profit margin shows that the business is thriving on a high positive profit which is always a goal for any investor.
Any recorded Return on the owner’s capital that is below 2% is considered a value killer. In our calculation, the return on the owner’s money for the financial year 2018 is 22.10%. The financial year 2019 is 10.90%, which indicates that our small bakery is operating on a better return on the owner’s capital. Comparing the two financial years, we can confidently say that the small bakery business can create value from the invested money.
In the financial analysis, the current ratio is significant and helps to weigh the liquidity of a business position. The current balance for our small bakery is 2.3 for the financial year 2018 and 3.6 for 2019. These ratios indicate that the business has substantial resources to meet its current liabilities. Though this will be viable only if all the current liabilities were due, the small bakery business could quickly turn its existing assets into money, which can help maximize its products. In addition, the current ratio can also be utilized in the industry to maximize its overhead costs.
The quick ratio determines the short-term liquidity position of a business. I also determine the potentiality of the company to meet the current financial obligation using the existing assets. The quick ratio for the financial year 2018 is 5.5. The financial year 2019 is 11.4; these ratios show that the small bakery business is solid enough to cater to its current liabilities. The proportions also indicate that the firm has enough liquid assets to clear the short-term obligations. Therefore, the small bakery has a high chance of getting investment loans as the investors assess a business’s quick ratio (Johri & Maheshwari, 2015). The quick ratio is like a sum-up indicator of business growth as it shows how a company can quickly convert its assets to pay debts. Generally, the higher the quick ratio, the higher the chances of a sustainable and long-lasting business.
The inventory turnover indicates the number of times a business can be in a pole position to replace its complete items such as properties and goods in stock within a particular time. In the field of business, an inventory turnover of between 5 and 10 is advocated. The higher the inventory turnover, the more flexible and efficient the company retains the inventory supply. The inventory turnover for the financial year 2018 was 1.3, and that of 2019 was 1.4. These inventory turnovers fall below the advocated inventory turnover range of 5 to 10. The inventory turnover bellows the recommended range that the business product is selling slowly and could also mean overstocking. The small inventory turnover ratio might start additional costs for the small bakery business, such as an increased cost for storage and expired products.
In conclusion, due to the slow flow and sales of products of the small bakery business as indicated by the small inventory turnover ratios. I would recommend the bakery owner deploy some measures that could boost sales, such as seasonal pricing, free delivery of the product ordered, and discounted fees to fasten the movement of the product. I would also recommend that the bakery owner restock and only order new products when the old stock has been depleted. It will be the only trick for sustainability, efficiency, and affordability in the business run.
Reference
Alexander, S. ( 2013, Jan 11,). CHS profit down, revenue up as some margins shrink: CHS said profit margins narrowed on agricultural and energy products. Star Tribune; D.2. Retrieved from https://www.proquest.com/newspapers/chs-profit-down-revenue-up-as-some-margins-shrink/docview/1268756224/se-2?accountid=151051
John, S., & Maheshwari, T. (2015, Jan-Jun ). AN EMPIRICAL STUDY ON THE PRACTICAL EFFICACY OF IDEAL FINANCIAL RATIOS. Ranjana; 41-52. Retrieved from https://www.proquest.com/scholarly-journals/empirical-study-on-practical-efficacy-ideal/docview/1793331061/se-2?accountid=151051