Lady M Cofection Financial Analysis Case Solution
Lady M Confection was founded in May. 2001. It operates in the confectionary industry and has a specialization in providing delicious cakes and confectionaries to its customers. It has established a name and a prominent brand image for itself by entering into the wholesale market of providing cakes and pastries to the large and luxurious hotels, restaurants and the retailers in the New York City. The financial analysis of the company will be performed in this report i.e. ratio analysis, change of percentage in items of balance sheet, income statement, common size analysis and DuPont analysis. The analysis will assist in determining the company’s financial and operational strength which will enable the company to grow and prosper in the future. Moreover, the year 2012 is compared with the year 2013 in order to determine the performance of the company from the previous year. Hence, the comprehensive analysis is performed in this report to identify the different components of statement of financial position and statement of earnings of the company.
Ratio analysis is performed on various components of income statement and balance sheet in order to determine various performance indicators of the company. The ratios which are analyzed and determined are liquidity ratios and profitability ratios in detail.
The liquidity ratios involves current ratios, quick ratios, inventory turnover ratios, days sales outstanding ratios, average sales per day ratio, fixed assets turnover ratio, total assets turnover ratios and time interest earned ratios. (MIHIR A. DESAI, 2015). Moreover, the profitability ratios of the company includes profit margin, operating profit margin, gross profit margin, basic earning power of the company, return of assets and return on equity. These ratios are analyzed in detail below.
Current Ratio and Quick Ratio
The current ratio helps in determining the level of current assets in comparison to the level of current liabilities. The current ratio of greater than 1 indicates that the current assets of the company are greater than the current liabilities, which is considered as a positive sign for the company and provides an indication that the company is liquid whereas the quick ratio of the company also provides the same information regarding the liquidity of the company but the quick ratio determines the more clearer picture by subtracting the less liquid items from the current assets i.e. inventory (MIHIR A. DESAI, 2015). Hence, the current ratio and quick ratio of the company for the year 2012 is 1.28 and 1.17 respectively. The current ratio and the quick ratio increased in the year 2013 i.e. 3.02 and 2.52 respectively. Thus, the increase in the current ratio and the quick ratio indicates that the company’s liquidity is improving which is considered as a positive sign for the company.
Inventory Turnover Ratio
The inventory turnover ratios help to determine that how efficiently the company’s management is converting the inventory of the company into sales i.e. turning over the raw material into final product and selling it to the end user. Hence, the inventory turnover ratio of the company has increased from 56 times to 101 times which indicates that the company has increased its revenue by selling the inventory to the final users of the goods manufactured. High inventory turnover ratio provides a positive sign for the company because revenue generation is increased in comparison to the inventory produced by the company from the years 2012 till 2013. (MIHIR A. DESAI, 2015).
Days Sales Outstanding
Days sale outstanding ratios provides information about how the company is managing its receivable i.e. how efficiently the company is managing to collect the receivables which provide information about how liquid the company is, in term of liquidity management through accounts receivable. (MIHIR A. DESAI, 2015). Thus, the days sales outstanding ratio of the company has declined from 2012 till 2013 which indicates that the company has improved the number of days in collecting the receivables i.e. the company is efficiently collecting the accounts receivable in comparison with the previous years.
Average Sales per Day
The average sales per day also increased from 2012 to 2013 which provides an indication that the company has managed to increase its revenues as compared to the previous year which is a positive sign for the company, as the sales of the company is growing.
Fixed Assets turnover
The fixed assets turnover of the company provides an indication that how the company is utilizing its fixed assets in order to generate the revenues. Although sales of the company have increased from the previous years but the fixed aster turnover of the company declined in comparison with the previous year i.e. fixed asset turnover ratio has declined from 9.185 to 4.952 (MIHIR A. DESAI, 2015). Hence, this decline in fixed assets turnover ratio also provides an indication that the company has increased its investment in fixed assets of the company which resulted in the decline of fixed assets turnover ratios.
Total Assets Turnover Ratio
The total asset turnover ratio provides an information on how the company is utilizing its total assets in generating the revenue for itself. Thus, the total assets turnover ratio of the company declined from 2012 to 2013 i.e. declining from 2.95 to 2.53 which provides an indication that the company’s total assets have increased in comparison with the revenues generated by the it, because the revenue of the company has increased from previous year.
The debt ratio of the company is calculated by dividing total liabilities to total assets. The debt ratio provides an information about how much debt is incurred by the company in comparison to the assets acquired by the company (MIHIR A. DESAI, 2015). The debt ratio of the company has declined from 70.08% to 57.53%, which is a positive sign for the company as its debt has declined from the previous year in comparison with the assets in the year 2013.
Time Interest Earned Ratio
Time interest earned ratio is calculated by dividing earnings before interest and taxes from interest expense. Time interest earned ratio provides information that how many time the interest expense is paid through operating income earned by the company. Hence, the time interest earned of the company has increased from the period of 2012 to 2013 which provides an indication that the company has managed to increase its operating income through efficient and productive use of its management and operations. (MIHIR A. DESAI, 2015) The company’s time interest earned has increased from 34 time to 50 time which is a positive sign for the company.
The profit margin of the company includes net income margin, gross profit margin and the operating profit margins. The margins can be increased due to 2 factors which involve that either the revenues of the company has increased or the cost of goods sold or operating expense of the company has declined (MIHIR A. DESAI, 2015). In current scenario the company’s entire margins inclined due to the increase in revenue which is considered as a positive sign for the company as the revenue has inclined as the wider acceptance of their product within the industry………….
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