A few years ago, I decided to expand my coffee shop business and bought a coffee roaster. I created my own brand, America’s famous, and started selling vacuum-packed coffee in local supermarkets. It was a huge success! Sales of my vacuum-packed coffee skyrocket and soon become the item most sold in my company. To be honest, I have concentrated on sales and no other items in the income statement or balance sheet. A finance intern from Kean University prepared the Table below. I am a little embarrassed to confess that I don’t know what most of the ratios mean. However, I noticed that some of the ratios are below the industry median, and I am anxious. Should I be worried? Is my business on the edge of being broke? What can you say about the financial performance of The America’s famous Co? Do you have any suggestions? The America’s famous Co. Industry Median Current ratio 0.74 1.43 Quick ratio 0.39 0.35 Cash ratio 0.15 0.21 Total asset turnover 2.01 0.85 Inventory turnover 27.96 6.15 Receivables turnover 54.91 9.82 Total debt ratio 0.43 0.52 Debt-equity ratio 0.74 1.08 Equity multiplier 1.74 2.08 Times interest earned 5.26 8.06 Cash coverage ratio 8.12 9.41 Profit margin 5.01% 5.10% Return on assets 10.08% 9.53% Return on equity 17.59% 15.14%

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter18: Pricing And Profitability Analysis

Section: Chapter Questions

Problem 10E

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A few years ago, I decided to expand my coffee shop business and bought a coffee roaster. I created my own brand, America’s famous, and started selling vacuum-packed coffee in local supermarkets. It was a huge success! Sales of my vacuum-packed coffee skyrocket and soon become the item most sold in my company. To be honest, I have concentrated on sales and no other items in the income statement or balance sheet. A finance intern from Kean University prepared the Table below. I am a little embarrassed to confess that I don’t know what most of the ratios mean. However, I noticed that some of the ratios are below the industry median, and I am anxious.

Should I be worried? Is my business on the edge of being broke? What can you say about the financial performance of The America’s famous Co? Do you have any suggestions?

The America’s famous Co.	Industry Median
Current ratio	0.74	1.43
Quick ratio	0.39	0.35
Cash ratio	0.15	0.21
Total asset turnover	2.01	0.85
Inventory turnover	27.96	6.15
Receivables turnover	54.91	9.82
Total debt ratio	0.43	0.52
Debt-equity ratio	0.74	1.08
Equity multiplier	1.74	2.08
Times interest earned	5.26	8.06
Cash coverage ratio	8.12	9.41
Profit margin	5.01%	5.10%
Return on assets	10.08%	9.53%
Return on equity	17.59%	15.14%

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