ACC 307 Final Project Part II: Ratio Analysis Report

[Your Name]

Southern New Hampshire University

 Abstract

Financial analysis is necessary for determining a company’s financial health and stability.

It assists in determining the existing financial position along with financial requirements that are

yet to come. The focus in this paper is on Peyton Approved organization. In order to understand

the financial position of the company, quick ratio, gross margin, net margin, return on sales and

return on equity will be computed and discussed in the following section.

Comparison Ratios:

Industry
2017 2016 2015
Standard
Quick Ratio 1.66 2.2 2.8 1.75
Gross Margin 0.59 0.55 0.7 0.7
Net Margin 0.23 0.22 0.32 0.24
Return on Sales 0.23 0.24 0.26 0.23
Return on Equity 0.89 0.9 0.78 0.8

The quick ratio is a way to determine the organization's ability to pay its short-term

liabilities. The ratio measures the firm’s ability to quickly convert short-term assets to cash to be

able to pay short-term debt. Like the gross profit margin, the ratio measures the amount of

money left after COGS is taken into consideration. However, the difference here is that revenue

is divided by net income instead of revenue divided by COGS (Wahlen, Jones, & Pagach, 2017).

The gross profit margin measurement shows an organizations amount of excess money after all

expenses comprised of the cost of goods sold is left to pay other debts or saved as profits. Return

on sales is used for evaluating operational efficiency of a company. This measure provides

understanding into how much profit is generated by the organization against each dollar of sales.

Return on equity is a measurement of how well a company is generating profit from the use of

investor’s money by dividing net income by shareholders equity. The higher the number the
better the organization is using their shareholders equity to generate profits (Warren, Reeve, &

Duchac, 2008).

Comparison

As per the data provided by the quick ratio of Peyton Approved, the quick ratio of the

company has drastically decreased in 3 years from 2.8 in 2015 to 1.66 in 2017. As compared to

the industry average (1.75), the quick ratio of the company is low (1.66). As per the given data,

the Peyton Approved has seen a decrease in gross profit margin. It was 0.7 in 2015 and

decreased to 0.59 in 2019. As compared to the industry average (0.7), the gross profit margin of

the company is low (0.59). Similarly, there is also a decrease in the net profit margin. The net

profit margin has decreased from 0.32 in 2015 to 0.23 in 2017. The net profit margin of the

company is slightly below the industry average. Similar to other ratios, return on sales also

decreased from 0.26 in 2015 to 0.23 in 2017. The industry average is same in terms of return on

sales. Finally, the organization has seen an increase in the return of equity. It increased from 0.78

in 2015 to 0.89 in 2017. The return on equity is also high as compared to the industry average

(0.8).

Conclusions

From the above calculations and discussions, it can be seen that financial health of the

company has affected in last 3 years. The company could not perform well in terms of quick

ratio, gross margin, net margin and return on sales. The performance of the company in these

areas is below the average of the industry. The organization has only seen an increase in the

return on equity. Overall, the performance of the company was not so good from year 2015 to

year 2017.
 References

Wahlen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate accounting: Reporting and

analysis (2nd ed.). Boston, MA: Cengage Learning.

Warren, C. S., Reeve, J. M & Duchac, J. (2008). Financial and Managerial Accounting, (10th

Edition). Cengage Learning.