Critical Thinking Paper Module 2 - Happy Hamburger Company Finacial Analysis Exercise

# Critical Thinking Paper Module 2 - Happy Hamburger Company Finacial Analysis Exercise

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HAPPY HAMBURGER COMPANY MODULE 2 QUESTION 1 Happy Hamburger Company Module 2 Question Marcial Dumlao (FIN500-2) – Principals of Finance Colorado State University – Global Campus Dr. Bill Makkawi July 24, 2016

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HAPPY HAMBURGER COMPANY MODULE 2 QUESTION 2 Happy Hamburger Company Module 2 Question Problem Statements Keown, Martin, and Petty (2014) provides the formulas to calculate financial ratios: current ratio, days sales outstanding (DSO), inventory turnover, fixed asset turnover, total asset turnover, return on sales, return on assets, return on equity, and debt ratio. The income statement (Appendix 1) and balance statement (Appendix 2) for Happy Hamburger Company provided to calculate the financial ratios (Appendix 3). Using the calculated financial ratios, discuss the strengths and weaknesses of Happy Hamburger Company compared to industry averages displayed in Table 3 (Appendix 3). In addition, what-if scenario presented, if the firm’s sales, inventories, accounts receivables, and common equity doubled during the year, how would this affect the financial analysis? Rules and Financial Ratios Current ratio. Dumlao (2016), posits that current ratio, retrieved from a firm’s balance sheet, indicates if current assets can cover current liabilities and liquidity and the equation is current assets/current liabilities. Current ratio is a type of liquidity ratio, and measures firm’s ability to cover it short- term obligations (Lan, n.d.). The higher ratio > 1 indicates that the current assets such as cash and near assets are very strong to cover current liabilities, and ratios < 1 indicates that cash and near cash assets are weak and may not be able the firm’s current obligations at that point in time (Keown, Martin, and Petty, 2014, Macs Finance, 2015). In addition, a very high current ratio may indicate to management to look into effective use of assets. Current ratio < 1 may not necessarily indicate a firm has a critical problem if the firm has good long-term prospects and can borrow against those prospects to meet its obligations (Macs Finance, 2015). Also current ratio of firms should be compared against firms in similar industry and against its respective industry averages because certain industries may different financial strategies to obtain cash
HAPPY HAMBURGER COMPANY MODULE 2 QUESTION 3 assets to cover its liabilities, i.e., automobile industry for trailing twelve months (TTM) for 2015 current ratio is 1.3, and for the health industry it is 2.77 (MSN Money, 2016, TSLA, 2016) Days sales outstanding (DSO) and turnover ratios. Investopedia (n.d.), defines DSO as average number of days a firm takes to collect revenue after a sale is made, calculated by amount of accounts receivable during a given period / (sales during the same period/the number of days in the period measured). It gives an indication of how long a firm takes to collect its accounts receivables; high DSO reflects firm selling its services and products via credit to customers and taking too long to collect money (Investopedia, n.d.).

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