To: Gary Bisonette From: Joseph Joy(10044145) Section 6 Subject: Simpson Baked Goods Company Financial Statement Analysis

Date: 9/28/2012 Companys Trend Analysis: Over the past few years the current ratio has gone up consistently indicating that Simpsons Baked Goods is most likely solvent and will be able to meet its liquidity needs. However, surprisingly at the same time the quick ratio has been going down, which means that a large portion of current assets are tied up in inventory which could pose liquidity and solvency issues.(Is this right) Average Age of Inventory for the company has been going down so there will be less strain on the organizations cash flow. Average Collection Period has been increasing slightly, meaning that there is a slightly higher short term pressure on the organizations liquidity. Total Asset Turnover has gone up, thus the company is using its assets more efficiently to generate sales. Debt to Asset Ratio has increased meaning the company is more prone to have solvency issues, but it also shows that management is willing to be more aggressive with risk and is showing willingness to borrow money for business ventures. Times Interest earned Ratio has gone down, so the business should worry slightly more about solvency position and ability to service its debt. Gross Margin has gone down so the company is becoming less profitable Profit Margin has gone down so it is becoming less profitable Return on Total Assets is going done, so investments in assets are becoming less profitable. Return on Equity is going down also, thus investments in equity are becoming less proftiable.

Comparative Analysis: Current Ratio is much higher than industry average so this business will have an easier time keeping the organization solvent and meeting its liquidity needs when compared with other companies in the industry. Quick Ratio is less than industry average so it might have harder time covering short term obligation from existing cash and near cash resources in comparison to other countries.. Average Age of Inventory is significantly higher than industry average, so this may be a concern because the company may not be able to get full selling price and may

put more strain on the organizations cash flow when compared with other companies. Average Collection Period is slightly higher than industry average which means it has a slightly higher short term pressure on the organizations liquidity Total Asset Turnover is lower than industry average so that means this organization is using its assets less efficiently than most companies in the industry. Debt to asset ratio is more than double the industry average thus these companies managers are more prone to solvency issues given high cost of servicing debt, also it shows that this management team is much more aggressive with respect to risk, and more willing to borrow money to fund business ventures when compared to other companies in the industry. Times Interest earned Ratio is significantly lower than rest of industry, so the business will have to worry more about solvency position and ability to service its debt Gross Margin is higher than industry, meaning this company is slightly more profitable than others in the industry. Profit Margin is less than industry average so this is a less profitable company that has worse control over its costs compared to its competitors. (conflicting) Return on total assets in less than industry average, so other companies are investing more efficently into their assets Return on equity is also less than industry thus the equity investments of other companies are more profitable than this company.

Balance sheet observations: Taken on more long term debt, more prone to risk in the future. Net income is positive so company is currently operating under profit Solvency ratio is good, so it is very likely that the company will be able to meet its debt obligations.

Calculations: Return on Sales= 51673/6937525=.745% Return on Total Assets=51673/4271875=1.21% Return on Equity=51673/1836906=2.81% Quick Ratio= 34175+1101195/1592897=.713 Current Ratio=2093124/842072=2.49 Debt to Asset Ratio=2434969/4271875=.57 Debt to Equity Ratio=2434969/1836906=1.32 Times Interest Earnings Ratio=209151/123030= 1.7 Average Age of Inventory= 5063368/957754=5.29times= 365/5.29=69.0days Average collection period=6937525/365=19006.92, 1101195/19006.92=57.94 days
Profit Margin=51673/6937525=.745% Gross Profit Margin Revenue-Cogs/Revenue=1874157/6937525=27.0% Solvency Ratio=Net Income + Depreciation/Total Liabilities= 51673+683500/2434969=.302 Total Asset turnover(times)= net sales/ total assets=6937525/4271875=1.62