Calculate the 12 ratios for James Confectioners for this year.
Calculate the 12 ratios for James Confectioners for this year.
Case
Calculate the 12 ratios for James Confectioners for this year.
6 James ConfectionersâPart 1
Squeezed by Rising Costs, a Confectioner Struggles to Cope
Telford James and his wife Ivey are the second-generation owners of James Confectioners, a family-owned manufacturer of premium chocolates that was started by Telfordâs father, Frank, in 1964 in Eau Claire, Wisconsin. In its nearly 50 years, James Confectioners has grown from its roots in a converted hardware store into a large, modern factory with sophisticated production and quality control equipment. In the early days, all of Frankâs customers were local shops and stores, but the company now supplies customers across the United States and a few in Canada. Telford and Ivey have built on the companyâs reputation as an honest, reliable supplier of chocolates. The prices they charge for their chocolates are above the industry average but are not anywhere near the highest prices in the industry even though the company is known for producing quality products.
Annual sales for the company have grown to $3.9 million, and its purchases of the base chocolate used as the raw materials for their products have increased from 25,000 pounds 20 years ago to 150,000 pounds. The Jameses are concerned about the impact of the rapidly rising cost of the base chocolate, however. Bad weather in South America and Africa, where most of the worldâs cocoa is grown, and a workersâ strike disrupted the global supply of chocolate, sending prices upward. There appears to be no relief from high chocolate prices in the near future. The International Cocoa Organization, an industry trade association, forecasts world production of cocoa, from which chocolate is made, to decline by 7.2 percent this year.1 Escalating milk and sugar prices are squeezing the companyâs profit margins as well. Much to James and Iveyâs dismay, James Confectionersâs long-term contracts with its chocolate suppliers have run out, and the company is purchasing its raw materials under short-term, variable-price contracts. They are concerned about the impact that these increases in cost will have on the companyâs financial statements and on its long-term health.
Ivey, who has the primary responsibility for managing James Confectionersâs finances, has compiled the balance sheet and the income statement for the fiscal year that just ended. The two financial statements appear below:
Assets | |||
---|---|---|---|
Current assets | |||
Cash | $ 161,254 | ||
Accounts Receivable | $ 507,951 | ||
Inventory | $ 568,421 | ||
Supplies | $ 84,658 | ||
Prepaid Expenses | $ 32,251 | ||
Total Current Assets | $ 1,354,536 | ||
Fixed assets | |||
Land | $ 104,815 | ||
Buildings, net | $ 203,583 | ||
Autos, net | $ 64,502 | ||
Equipment, net | $ 247,928 | ||
Furniture and Fixtures, net | $ 40,314 | ||
Total Fixed Assets | $ 661,142 | ||
Total Assets | $ 2,015,678 | ||
Liabilities | |||
Current Liabilities | |||
Accounts Payable | $ 241,881 | ||
Notes Payable | $ 221,725 | ||
Line of Credit Payable | $ 141,097 | ||
Accrued Wages/Salaries Payable | $ 40,314 | ||
Accrued Interest Payable | $ 20,157 | ||
Accrued Taxes Payable | $ 10,078 | ||
Total Current Liabilities | $ 675,252 | ||
Long-term Liabilities | |||
Mortgage | $ 346,697 | ||
Loan | $ 217,693 | ||
Total Long-term Liabilities | $ 564,390 | ||
Ownerâs Equity | |||
James, Capital | $ 776,036 | ||
Total Liabilities and Ownerâs Equity | $ 2,015,678 | ||
Income Statement, James Confectioners | |||
Net Sales Revenue | $3,897,564 | ||
Cost of Goods Sold | |||
Beginning Inventory, 1/1/xx | $ 627,853 | ||
+ Purchases | $2,565,908 | ||
Goods Available for Sale | $3,193,761 | ||
â Ending Inventory, 12/31/xx | $ 568,421 | ||
Cost of Goods Sold | $2,625,340 | ||
Gross Profit | $1,272,224 | ||
Operating Expenses | |||
Utilities | $163,698 | ||
Advertising | $155,903 | ||
Insurance | $ 74,065 | ||
Depreciation | $ 74,043 | ||
Salaries and Benefits | $381,961 | ||
E-commerce | $ 38,976 | ||
Repairs and Maintenance | $ 58,463 | ||
Travel | $ 23,385 | ||
Supplies | $ 15,590 | ||
Total Operating Expenses | $ 986,084 | ||
Other Expenses | |||
Interest Expense | $119,658 | ||
Miscellaneous Expense | $ 1,248 | ||
Total Other Expenses | $ 120,906 | ||
Total Expenses | $1,106,990 | ||
Net Income | $ 165,234 |
To see how the companyâs financial position changes over time, Ivey calculates 12 ratios. She also compares James Confectionersâs ratios to those of the typical firm in the industry. The table below shows the value of each of the 12 ratios from last year and the industry median:
James Confectioners | |||
---|---|---|---|
Ratio | Current Year | Last Year | Confectionery Industry Median* |
*from Risk Management Associates Annual Statement Studies. | |||
Liquidity Ratios | |||
Current ratio | 1.86 | 1.7 | |
Quick ratio | 1.07 | 0.8 | |
Leverage Ratios | |||
Debt ratio | 0.64 | 0.7 | |
Debt-to-Net-Worth ratio | 1.71 | 1.0 | |
Times-Interest-earned ratio | 2.49 | 2.3 | |
Operating Ratios | |||
Average Inventory Turnover ratio | 4.75 | 4.9 | |
Average Collection Period ratio | 34.6 | 23.0 days | |
Average Payable Period ratio | 31.1 | 33.5 days | |
Net-Sales-to-Total-Assets ratio | 2.17 | 2.1 | |
Profitability Ratios | |||
Net-Profit-on-Sales ratio | 7.40% | 7.1% | |
Net-Profit-to-Assets ratio | 9.20% | 5.6% | |
Net-Profit-to-Equity ratio | 29.21% | 16.5% |
âHow does the financial analysis look for this year, Hon?â Telford asks.
âIâm about to crunch the numbers now,â says Ivey. âIâm sure that rising chocolate prices have cut into our profit margins. The question is âhow muchâ?â
âI think weâre going to have to consider raising prices, but Iâm not sure how our customers will respond if we do,â says Telford. âWhat other options do we have?â
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