1 The Exceptional Service Grading Company - Case Study University of The People BUS5111: Managerial Accounting Dr. Halstead Written Assignment 1 Gross Profit Margin - Gross profit margin, also known as gross margin, is a financial metric that indicates how efficient a business is at managing its operations. It is a ratio that indicates the performance of a company's sales based on the efficiency of its production process. (Carlson, 2020) Gross Profit Margin = (Net Sales – Cost of Goods Sold) ÷ Net Sales Year 2017: (6 595 400 – 4 957 800) ÷ 6 595 400 = 24.83% Year 2018: (9 200 000 – 6 503 100) ÷ 9 200 000 = 29.31% Current ratio - The current ratio measures the ability of a company to repay its current liabilities. This is computed by dividing current assets by current liabilities. (Finance For Managers, 2012) Year 2017: 4 576 900 ÷ 3 292 850 = 1.39:1 Year 2018: 5 652 200 ÷ 3 325 950 = 1.7:1 Debt ratio – It is the ratio of debts to assets (in actuality total liabilities to total assets). It measures the percentage of funds provided by current liabilities and by long-term debt. (Finance For managers, 2012) 2 The debt to asset ratio is commonly used by creditors to determine the amount of debt in a company, the ability to repay its debt, and whether additional loans will be extended to the company. (CFI, 2021) Debt ratio = Total Liabilities ÷ Total Assets Year 2017: 5 875 400 ÷ 5 875 400 = 100% Year 2018: 4 170 300 ÷ 7 007 800 = 59.51% Total Asset Turnover Ratio – Total asset turnover ratio gives us an idea how effectively a firm uses its assets to generate sales. (Finance For Managers, 2012) = Total Revenues ÷ Total Assets (for the same time period) Year 2017: 6 595 400 ÷ 7 007 800 = 0.94 times Year 2018: 9 200 000 ÷ 5 875 400 = 1.57 times Return on Equity – This ratio tells us whether the return investors are earning on their investment. The higher the ratio better. = Net Income ÷ Shareholder’s Equity Year 2017 = 6 595 400 ÷ 1 807 500 = 3.65% Year 2018 = 9 200 000 ÷ 2 837 500 = 3.24% Conclusion Is there any viability for a new project? The Gross Profit Margin shows an increase in year 2018. This means that the company has more money to spend. 3 The Current ratio is shown to have increase in year 2018 showing that the company is able to pay its short-term debts. The Debt ratio improved immensely in year 2018. It went from 100% to 59.51% showing that has more assets than debts. A low ratio indicates how effective a firm is in using its assets to generate sales. (Finance For Managers, 2012) The Total Asset Turnover Ratio is higher in year 2018. If the asset turnover ratio is relatively high, then the firm is efficiently using its assets to generate sales. If it is relatively low, then the firm is not using assets effectively and may want to consider selling some assets if sales do not increase. (Finance For Managers, 2012) The Return on Equity went a little down in year 2018. This shows that for every dollar of shareholders' equity, an investor would generate 3.24 cents in profit. Judging from the above applied analysis ratios, this business, could be considered a viable investment. All this, of course, is in hoping that the future years will continue to improve as year 2018 did. I think the assets in 2018 went up because there were dividends that were paid in year 2018, as indicated on the Balance Sheet. This means that the business is better able to pay off its debts. After having seen all the above, it would be wise to gain access to previous years’ financial statements to see the trend and understand the business better. There is also a need to look at the qualitative factors that play a part in the business. A business should never be judged on the basis of the financial statements alone. 4 References Carlson, R. (2020, December 23 ). Business Finance. Retrieved from Business Finance Web Site : https://www.thebalancesmb.com/what-is-the-gross-profit-margin-393201 CFI. (2021). Retrieved from CFI Web Site : https://corporatefinanceinstitute.com/resources/knowledge/finance/debt-to-asset-ratio/ Finance For managers. (2012). Creative Commons by-nc-sa 3.0. Finance For Managers. (2012). Creative Commons by-nc-sa 3.0. Finance For Managers. (2012). Creative Commons by-nc-sa 3.0.
