Accounting and Working Capital of Wholefoods - Assignment Example

The current ratio is a measure that is used to show the ability of a company to clear its short-term debts by the use of current assets. The preferred current ratio is usually 2:1 or 1.5: 1 depending on the industry in that the company is founded. Current ratio= current assets / current liabilities 2005 2006 Current assets 623981 672529 Current liabilities 509770 418383 Current assets/ current liabilities 623981/509770 672529/418383 Current ratio 1.224 1.6074 The company is improving in performance and that shows that the company will be able to cater for its short term obligations.

However, in comparison with the industry’s average, the company is performing the average. That means that the company has potential that it can exploit so as to be at the same level as the industry players and that would contribute to the success of the company because more investors would be attracted. Acid test ratio The acid test ratio is used to show the ability of a company to clear its short-term debts with the use of current assets but excluding inventory. Inventory may at times not be liquid and that means that it cannot be f much help in a short duration of necessity.

Acid test ratio= quick assets / current liabilities The quick assets include the current assets less stock. Stock is not treated as a quick asset as a result of its nature. 2005 2006 Current assets less inventory 623981-203727=420254 672529-174848= 497681 current liabilities 509770 418383 Current assets- inventory/ current liabilities 420254/509770 497681/418383 Acid test ratio 0.8244 1.1895 The ratios also signify the ability of the company to cater for its short term obligation using current assets.

The acid test ratio for the company is also not within the industry’s average. However, the company has made significant progress and that implies that if the trend continues, the company will be able to match the industry’s average. Return on equity The return on equity is the rate at which the company is able to utilize the shareholder's funds. The rate should be favorable so as to ensure that the company shareholders get a reason to always do business with the company. It shows the amount of net income that is usually returned as a percentage of the equity contributed by shareholders.

The ratio is useful in the measurements of the profitability of a company because it reveals the amount of profit that is generated by a company from the money invested by the shareholders. ROE= Net income/ average owners 2005 2006 Net income 203828 136351 Shareholders’ equity 1404143 1365676 Net income/ shareholders equity 136351/1404143 203828/1365676 ROE 9.7% 14.93% The return on equity for the company is way below the industry’s average. Although the performance of the company is improving, much more has to be done so as to attain confidence from investors.

Return on investment The ratio is used as a measure for performance and it is usually useful in the measurement of efficiency for any investment. It is also useful in the comparison of efficiency for investments in the calculation of ROI. The benefit that is gained from investing is usually divided by the costs that were incurred in investing. ROI= net income/ average total assets The average total assets can be treated as the cost of investment and the net income the gain from the investments.

2005 2006 Gain from investment 9623 20736 Cost of investment 99964 99964 (gain –cost)/cost 9623/99964 20736/99964 ROI 0.096 0.2074 The return on investment for the year 2005 is below the industry’s average. However, in the year 2006, the company was able to outdo the industry’s average and that is an indicator that it was able to maximize its strong points. The company’s performance is also below the industry’s average and that should be dealt with. Margin It’s a financial metric that is useful in the assessment of the financial health of a company in proportion to the money that has been used from the revenue of the company. 

Gross profit margin= net sales/ sales The net sales are equal to sales less the cost of sales and hence equivalent to the gross profit. 2005 2006 Net sales 1649105 1959642 sales 5607376 4701289 Gross profit/ revenue 1649105/5607376 1959642/4701289 margin 0.2941 0.0416 The margin for the year 2005 was favorable; however, in the year 2006, the efficiency of the company may have reduced because the margin ratio also declined. The rate of efficiency is below the industry average and therefore whole foods should try and improve on the efficiency levels so that it can be equally competitive. 

Turnover The ratio shows the sales of the company that are generated from the money that is invested in assets. Asset turnover= sales/ average total assets 2005 2006 Revenue 5607376 4701289 Assets 1889296 2042996 Revenue/ assets 5607376/1889296 4701289/2042996 Turnover 2.97 2.30 The turnover for the company is not badly off although more should be done so as to ensure that all things are carried out as they should. From the analysis, whole foods company is a company that investors should avoid because there it is working below the industry average and that is not a good thing for the investors.

Investors usually prefer a company that is competitive enough and that will be the driving force for the investors.