Ratio Analysis

There are different types of ratio analysis that people can use to help them understand the financial affairs of a company (Weygandt, Kimmel, & Kieso, 2010). The ratio that is used the most is the profitability ratio. Used by creditors and investors, it indicates the overall effectiveness of management. Profitability ratios are gross profit margin, operating profit margin and net profit margin. Liquidity ratios show if a company can pay its short-term debt. Managers and creditors need to keep a close eye on this to meet their short-term obligations. Solvency ratios are important for potential creditors because they show the company's ability to raise capital, so it can make payments on outstanding debt. In practice, bankers often include leverage ratios as debt covenants in contract agreements (James, & Media, 2012). Efficiency ratios show how well a company is using its assets and liabilities. Examples of efficiency ratios are inventory turnover, sales to receivables and return on assets (James, & Media, 2012). These different types of ratios are used by bankers, creditors, shareholders and accountants to test the success of a company.

The liquidity, profitability, and solvency ratios allow all users to identify the current financial health of Kudler Fine Foods. The liquidity ratios include the current ratio, acid-test ratio, and inventory turnover (Weygandt, Kimmel, & Kieso, 2010). Kudler Fine Foods currently does not have accounts receivable, so there is no need to compute the receivables turnover. The liquidity ratios show that the amount of liquid assets are high in comparison to the industry average which means that Kudler Fine Foods has plenty of assets that can be converted into cash fast. Once creditors take a look at the calculations presented in the report, they will be confident and pleased by the ability Kudler Fine Foods has to pay off their short-term liabilities.

By using the profitability ratio tools like profit margin, operating profit margin and net profit margin it was determined that Kudler Fine Foods has an asset turnover rate of 4.04 times, a profit margin of 6.27%, a high return on asset amount of 25.30%, and a return on owners capital of 35.09%. Liquidity ratios for the company show inventory turnover at 19.754 times which is a great result because this shows that the company is able to repay its short-term debts (Weygandt, Kimmel, & Kieso, 2010). Overall the company represents a solid income and a good number of assets which is a plus for creditors and lenders. This means assets can be turned into cash quickly. A company like this is an attractive opportunity for investors and with its solid background it makes decision making less stressful.

Liquidity, profitability, and solvency ratios were used in determining the financial situation of Kudler Fine Foods. The company's profit margin and liquidity ratios show that the company is making money. With a

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