replied 3 years ago.
Very Vegetarian Investment Review
VERY VEGETARIAN 2
This paper explores the potential investment or purchase of Very Vegetarian. Financial statements are presented for review of the Company’s finances. Certain financial issues will be identified, and an investment conclusion drawn, based on that review. Ratio analysis will be used to test the company’s financial viability and provide some basis to forecast its future and value as an investment.
VERY VEGETARIAN 3
Research and investigation of a business is crucial to investment success. While a business may become known from its prominence in the marketplace, how it has does what it has done is reported to stakeholders in its financial statements. Financial statements are reports of a company’s financial history. Financial statement review, both reading and applied, is critical to investigating a company’s past and determining much of its future.
Since an investment is being considered, one should try to determine how the company makes money, does it, what commitments does it have, and is it established for the long haul (is there financial risk to consider). What are the markups for its products, and how do they compare with traditional and specialty supermarkets? We can look at the business financials to examine key operating ratios, and compare them to accepted standards to highlight areas of concern or further investigation.
Financial statements are often the only source of financial information readily available to investors and stakeholders. The information contained in them and their presentation should be consistent with industry rules for consistency and appropriateness. Generally Accepted Accounting Principles, or GAAP, are the rules that companies must follow. There is some latitude in reporting, choices that can be made, but the content of the statements must be disclosed so that an informed reader can interpret what is being presented. Creativity is allowed as long as the rules and their intent is followed. The goal of adherence with GAAP is that a reader must not be misled about the entity or the financial statements taken as a whole.
Once we establish that the financial information can be relied upon by a reader/stakeholder, critical thinking can be applied to that information to test and compare the entity with known standards of performance, generally with competitors in the same field or industry. These measures comprise the entity’s financial health. Differences will indicate superior or inferior operating results, and generate areas for additional questioning.
Liquidity, or the access to cash, is the first measure of the company’s health. If the company has enough cash to meet its short term debt needs, that is considered a sign of good liquidity. A current ratio of 2:1 (current assets to current liabilities) is a good indicator. Very Vegetarian has $600,000 of current assets, $288,000 of current liabilities, for a ratio of 2.08:1. While the ratio is acceptable, I am not a fan of the makeup of the current assets. So much is accounts and notes receivable that I am not impressed. However, a cash business like a supermarket generates daily from sales, which may offset the makeup concern.
Profitability is an important measure of financial success. Markup on cost of goods sold is strong, with the markup being (290,000/410,000) over 70%, which is very strong when compared to traditional supermarkets and their industry standard of 15%. In Entrepreneur Magazine, retrieved from http://www.entrepreneur.com/answer/221767, October 19, 2013.
Debt ratios are also important in their measure of how heavy the debt burden is. Very Vegetarian has a debt ratio (total debt to total assets) of (613,000/826,000) 74%, which is very high. So much of the company has been financed by debt that this should be considered a risky investment or purchase.
Operating performance ratios, such as sales per employee, are not usable in this analysis as employee numbers are not available.
Cash flow ratios indicate where the firm’s cash flow is coming from, and any indication that does not mirror a strong correlation to sales is a notable problem. The operating cash flow to sales ratio for Very Vegetarian is ($52,000/700,000) 7.4%, which is very low. This indicator alone is enough to warrant passing on this investment.
Lastly, investment valuation ratios give an indication of a company’s worth and a measure of its enterprise value. The company compared to the book value of the equity in the company shows a return on book value of ($49,000/$213,000) 23%, which appears to reward the high leverage entered into. It cannot be looked at alone, and must be considered as part of an overall review.
Different businesses have different revenue cycles, fixed asset requirements, and as such ratios in one industry may not be comparable to all others. Supermarkets, for example, likely have little to no credit sales, and generate cash each sales day. Manufacturers of products likely have to deliver goods and wait for payment, so cash flow and inventory turn ratios will be very different for these two business types.
To summarize, the business being reviewed is a risky, high-debt entity with poor cash generation. The non-cash receivables are troubling, as is the amount of accrued salaries and income tax expense that could not be paid during the year. This is not a good candidate for investment or purchase.
Expert again...I went beyond the questions to actually reflect what the ratios actually could tell a reader. I thought it added validity to the general questions about ratios. Thanks for asking at Just Answer. When this question is accepted, I will ask the site to close access so that others can't use the essay you paid for.
PDtax, Master's Degree
Satisfied Customers: 4404
Experience: MBA/CPA, Former college instructor and tutor.
PDtax and other Business and Finance Homework Specialists are ready to help you