week 6 Economic Summary Report

Financial health of the Lemonade Stand Business

The lemonade stand business is partnership venture that deals in the sale of various beverage products. The two partners (owners) of this business have contributed each $ 20 as startup capital. Therefore it is important to note that the business is mainly run on the partners’ contributed capital and also credit granted by the suppliers. The financial health (performance) of Lemonade stand business can be accessed by comparing the financial ratios during season one and two and the overall period performance the entire period. The business financial health is therefore accessed using the statements that is presented as below.

Table 1: Lamonade business balance sheet as at first season and second season

Table 2: Lamonade business income statement for first and the second period

Table 3: Financial report

Return on equity (ROE)-A measure of financial performance which shows the amount of profit that the business is able to generate with every single amount of dollar of the shareholders capital. Retained on equity (ROE) =net income/equity. Lemonade business has a ROE of 75.9% and 58.2% for the first and the second season respectively. Hence showing that the business is doing well. For example in season one, for every 1 dollar invested, the owners get a return of 0.759 dollars.

Return on assets (ROA) - the ratio evaluates the profitability of the partnership business with respect to its assets. ROA is computed as net income divided by net assets. The business in the first season of operation shows a better performance since it indicates a higher ROA of 61.5% as compared to the second season with a ROA of 50.6%. Hence it can be deduced that the business first season was healthier than the second one. Again, in general, it is important to note that the business assets according to the ROA ratio are able to generate a good sale for the venture hence showing that the venture is a going concern.

Profit margin ratio-the ratios tells the partners how first the business is able to convert its sales into net income. For instance how much dollar in sales the partnership business keeps on generating. The business income statement reports that a higher sales is witnessed in season two as compared to the first one, thereby showing a higher profitability margin. The table below compares the profitability margin of the two season. Profitability margin=net profit/sales

Table 4: the profitability margin

Inventory turnover-the stock turnover of Lemonade business shows how many times during the season the stock was convert into sales. Inventory turnover ratio is of great importance when measuring the financial health of the business since it shows the rate of stock conversion into sales. Inventory turnover=sales/average inventory

Table 4: inventory turnover

Asset turnover-asset turnover tells the partners the efficiency of which the venture is able to utilize the assets in generating the revenue.

Asset turnover=

The first season has got a higher asset turnover of 0.907 as compared to the second season which is 0.702, this is because the first season has got a lower profit margin has compared to season one.

Current ratio- the ratio basically shows whether the business is able to meet its current financial obligation. It is obtained getting the difference between the current liabilities and the current assets. In the case Lemonade business, the partners can use the ratio to evaluate the venture financial health since it will give them the direction on financial borrowing. A current ratio of more than one shows that the company is able to meet its financial obligations since the assets is more than the liabilities For instance the business has a current ratio of 5.02 in the first season and 7.59 in the second season. By comparing the two it vivid that partners have borrowed much for the business in the first season has compared to the second season. Generally using current ratio it can be concluded that the firm is in good financial health.

Cash ratio- the ratio mainly measures liquidity of the various business. Mostly it is used show whether the business is able to meet its operational financial obligations from its most current resources without having to sell its assets. The cash ratio for the venture is 4.77 and 7.34 respectively. The ratios show that the venture is having a higher cash ratio hence able to meet its financial obligation without using its assets.

Debt-Equity ratio-the financial ratio is important in evaluating the business financial health in that it shows its leverage ratio. A firm leverage is basically the relationship between its equity and debt as the mode of financing its operations. For example is one that has got a higher debt in its capital structure. Lemonade business has a Debt-Equity ratio of 0.235 and 0.146 for the first and the second season respectively. The lower ratio shows that the business has got less debt as compared to equity hence showing that it is healthier for the partners to operate the business.

In a nutshell, the ratios discussed above have presented the financial health of this venture. The ratios are grouped into performance, liquidity, leverage and valuation ratios. For instance, liquidity rations which include current and cash ratios show that Lemonade stand business is able to meet its financial obligations as discussed above. Again performance ratios such as ROE and ROA shows that the partnership business has a higher return on the asset employed hence stipulating that the business is healthier financially.