Financial Analysis Report of Ace Hardware-Samples for Students

Question: Write a report on Financial Analysis of Ace Hardware. Answer: Introduction Analysis of financial statements helps in evaluating the business performance of the firm and provides the way to make financial decisions. Financial analysis can be carried through ratio analysis, trend analysis, and vertical horizontal analysis and other accounting tools. In this assignment financial analysis of ACE Hardware has been carried out last two years through using the ratio analysis technique. Ratio analysis is done to evaluate the liquidity, financial flexibility, operating capability and profitability of the given company. Calculation of financial Ratios Financial Ratios Formula Years 201X 201Y Liquidity Ratios Current Ratio Current Assets/Current Liabilities 1.71 1.47 Quick Ratio Quick Assets/Current Liabilities 0.68 0.61 Profitability Ratios Gross Profit Margin Gross Profit/Net Sales 26.07% 25.16% Net Profit Margin Net Profit/Net Sales 0.00001% 0.008% Return on Total Assets Net Profit/Total Assets 0.00003% 0.035% Return on Owner's Equity Net Profit/Shareholder's Equity 0.00082% 2.72% Efficiency Ratios Inventory Turnover Ratio COGS/Average Inventory 7.34 Accounts Receivable Turnover Credit Sales/Average ARs 8.76 Capital Structure Debt Ratio Total Liabilities/Total assets 0.97 0.99 Financial Data used to calculate the Ratio Particulars 201X 201Y Current assets $ 2,813,687.00 $ 2,106,718.00 Current Liabilities $ 1,642,469.00 $ 1,436,026.00 Inventory $ 1,697,220.00 $ 1,231,111.00 Quick Assets $ 1,116,467.00 $ 875,607.00 Gross Profit $ 3,791,024.00 $ 3,014,553.00 Net Profit $ 1.00 $ 993.00 Net Sales $ 14,543,837.00 $ 11,981,782.00 Total Assets $ 3,584,529.00 $ 2,799,502.00 Shareholder's Equity $ 122,483.00 $ 36,542.00 COGS $ 10,752,813.00 $ 8,967,229.00 Average Inventory $ 1,464,165.50 Credit Sales $ 8,726,302.20 $ 7,189,069.20 Total Liabilities $ 3,462,046.00 $ 2,762,960.00 Account Receivables $ 1,116,467.00 $ 875,607.00 Average Accounts Receivables $ 996,037.00 Analysis on Financial Performance of Ace Hardware In this segment, interpretation of financial performance of Ace Hardware will be analyzed in context to liquidity, financial flexibility, operating capability and profitability. This report compares the business performance in year 201X with the performance in year 201Y. Liquidity Analysis Liquidity analysis helps to measure the company ability to pay the short term liabilities through using the short term assets. This analysis evaluated the working capital status during the financial years and any discrepancy arises due to that. To evaluate the liquidity performance of the company, ratios like current ratio and quick are calculated. The current ratio measures the current assets divided by the current liabilities. It means, current ratios check amount of current assets company reserves to pay the current liabilities (Bull, 2007). Current ratio of the Ace Hardware was 1.47 times in year 201Y and it was increased to 1.71 times in year 201X. This shows that in the current year, amount of current assets has increased a lot more to pay the small increase in the current liabilities in year 201X. Increase in current assets in year 201X shows that liquidity position of the company was strong as compare to liquidity position in year 201Y. Quick Ratio also measures the liquidity position of the company but it ignore current assets such as inventory and prepaid expenses while making the calculation of quick assets. The main reason to not consider the inventory and prepaid expenses while making calculation of quick assets is that these assets do not provide quick availability cash and cash equivalents in the short period of time. Quick assets of the Ace Hardware was 0.61 times in year 201Y and it got increased to 0.68 times in year 201X that shows that financial performance of company was slightly increased in the current year as there was increase in short term assets during the year. Financial Flexibility Analysis Every Company requires funds to finance the business operations and to purchase fixed assets. Sources of capital are mainly divided into two category equity and debt capital. Equity capital refers to owners capital and it does bear any fixed charge on the income of the company (Fridson and Alvarez, 2011). On the other hand debt capital refers to outside capitals that are financed through banks or financial institutions. Debt capital bears the fixed charge on the profit of the company and this finance charge has to be paid irrespective of profit or loss to the company in the particular year. Debt and debt equity ratio are some of ratios that are consider for making the evaluation of the financial flexibility analysis. Debt ratio of Ace hardware in year 201Y was 0.99 times which indicates that almost 99% of the capital has been financed through the debt capital and in year 201X it was 97% that shows company financial position was highly leverage and due to this company has to bear fixe d interest charge every year. Operating Capability Operating capability means how efficient the company was in managing the business operations during the year (Fridson and Alvarez, 2011). For this purpose ratio like inventory turnover ratio, account receivable turnover ratios are being calculated to check the operating performance of the company. Inventory turnover ratio was 6.12 times in 201Y that indicates company has converted their inventory into sales only 6.12 times during the year. This reflects poor operation capability. Accounts receivable Turnover was 7.22 times in year 201Y that indicates that company allows credit of more than 45 days to their customers that is too large for such small business. Profitability Analysis Ratios like Gross profit margin, net profit margin, return on total assets and return on total shareholders equity are being calculated to evaluate the profitability of the company. Gross profit margin was highly dissatisfactory for the Ace Hardware Company as company mark up their goods at very low margin that do not even cover the operating expenses. Company has earned negligible amount of net profit during both the years (Drake and Fabozzi, 2012). This was same with ratios like return on total assets and return on total shareholders equity. So overall it can be said that profitability position of the company was highly negative and it requires quick response of the management. Conclusion Financial analysis is very important as it helps in evaluating the financial performance of the company during the year and also helps in comparing the financial performance of one year with the financial performance of other year. Financial performance of Ace Hardware was not good in both the year and it requires management to check the problems and make changes accordingly. References Bull, R. 2007. Financial Ratios: How to use financial ratios to maximise value and success for your business'. Elsevier. Drake, P. P. and Fabozzi, F. J. 2012. Analysis of Financial Statements. John Wiley Sons. Fridson, M. S. and Alvarez, F. 2011. Financial Statement Analysis: A Practitioner's Guide. John Wiley Sons