Running head: YelloW Leaf Fashion Inc Analysis 1
YelloW Leaf Fashion Inc Analysis 2
Yellow Leaf Fashion Inc
Analysis of Financial Position and Performance
The following report will provide an independent assessment of the performance and financial position for Yellow Leaf Fashion Inc.
The third year of Yellow Leaf Fashion Inc. has proven to be profitable with an increase in net income which almost doubled from the previous year. The following ratio’s also can provide insight to Yellow Leaf Fashion, Inc.’s current and future status for ongoing profits.
Liquidity ratio’s provide a measure that shows the company’s ability to pay short term liabilities. One of the most common measures for liquidity is the quick ratio or acid-test ratio. The calculation for the quick or acid-test ratio is dividing current assets minus inventory by current liabilities. The quick or acid test ratio for Yellow Leaf Fashion Inc. is 3.94:1 which shows that there are adequate assets to cover the liabilities that are currently owed. Ratio’s over 1 are considered adequate, so the current ratio of 3.94 is extremely high and makes the company appear to be efficient and solvent.
The other liquidity ratio that was reviewed was the current cash debt coverage ratio which is calculated by dividing cash from operating activities by average current liabilities. This ratio is even more conservative since it uses the cash from operating activity instead of current assets. With the Yellow Leaf Fashion Inc ratio of 1.4:1, the consensus would agree that the company is operating efficiently. Both of these ratios show that the company has enough assets to cover any debts that are currently owed and still could continue operating after these debts are paid. Both ratios are higher than the previous year. These ratios can be used by creditors to determine whether it is safe to lend money, suppliers may use it to determine if they will be paid in a timely manner and investors and stockholders can use these for a quick review to see if there are any problems that they should be aware of.
Activity ratios provide a measure that shows how quickly a company can convert its assets into cash or sales. The faster that it can convert, the better the ratio and more efficiently that the company is being run. The accounts receivable turnover is an activity ratio that will show how effectively the collection of credit sales are for a period of time. This is calculated by dividing net credit sales by average accounts receivable balance. The Yellow Leaf Fashion Inc. has a positive ratio of 3.0:1 which would lead us to believe that their collection process is operating effectively.
Inventory turnover is an additional ratio that gauges how quickly the company is selling and converting inventory into sales. This is calculated by dividing cost of goods sold by average inventory. The current inventory turnover ratio for Yellow Leaf Fashion Inc is 1.5:1. ...