final draft acc.docx

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Financial Analysis Report on Beer Guys Brewery Inc., Booze Hound and Brewsky LLC

MGT 2100A

Prof. S. Von Heyking

Interns:

Chase Carpenter

Nico Choruma

Chiayi Fu

Kemorine Reid

Esther Shittu

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Introduction

The aim of this project is to provide a financial analysis report about the following

companies: Beer Guys Brewery Inc., Booze Hound, and Brewsky LLC, in order to evaluate the

quality of these corporations when compared to one another. The comparison will feature a

horizontal analysis, vertical analysis, gross profit and operating profit percentage analysis, quick-

ratio, inventory turnover, accounts receivable turnover, debt ratio, and a conclusion of our

findings. We will be looking at financial statements from 2012 to 2013 to make our final

recommendations and ranking of the companies in question.

Horizontal Analysis

The horizontal analysis provides a comparative analysis of percentage changes recorded

from year to year on a company’s financial statements.

During the allocated time period Beer Guys experienced a decrease in net revenue of

9.71% as well as declines gross profit of 14.38 % and a cost of sales decrease of 4.20%. While

the cost of sales have gone down, the impact was not enough to provide a positive result net

revenue. There was a relative decline in the company’s expenses which indicates that there are

probably fixed costs associated with those accounts. Operating profit went down by 36.49% and

the company has successfully reduced it finance cost by 90.32%. However, its income before

tax was also on the decline of 94.02% which doesn’t bode well for the company seeing that its

income tax expense went up by 483.33%.

Assets in general declined particularly property plant and equipment (15.63%),

inventories (23.36%) and accounts receivables (42.62%) However there was a significant

increase in prepaid expenses. Shareholders capital increased by 27.25 this might have been done

to increase the availability of cash, which the company seems to be in dire need of with long

term debt increasing by 189.50% indicating that a loan was taken out which resulted in current

portion of long term debt increasing by 358.45%. With the increasing debt and decreases in

revenue and assets Beer Guys seems to be struggling to keep float.

With reference to Booze Hound, revenue and gross profit went up by 6.74% and 13.87%

respectively, while cost of sales and selling and marketing expense also increased. There was a

significant increase in the account for other expenses of 57.63% this may be related to the

increase observed for prepaid accounts as the company is attempting to build its assets. Another

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factor that might have contributed to this increase for other expenses is the increase of share

capital (8.25%) which the company may have purchased to increase cash. There have been

noticeable decreases in both current (specifically bank indebtedness. 26.68%) and non-current

liabilities (specifically long term debt, 29.84%) indicating that the company is steadily paying off

its debt.

Brewsky experienced a slight increase in sales of 0.04% and gross profit increase of

0.72% and small increase in cost of goods sold despite the decreases in marketing and general

admin expenses. However the decrease here could have affected the amount of sales record,

though not by much. Operating income went up by 6.30% and there was a noticeable decrease in

income taxes by 29.09% which may have affected the increase in net income. Interest expense

went up by 14.29% indicating that the company might have taken out a loan. Net income

increased by 17.65% as a result of expense being less than revenue during the allocated period.

The significant decrease noted for cash of 28.90% was perhaps done to offset the cost of long

term debt which decreased by 86.39% and cash was used purchase prepaid assets and equipment.

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Vertical Analysis

COMPREHENSIVE

INCOME

Beer Guys

Booze

Hound

Brewsky

LLC

2013 2012 2013 2012 2013 2012

Cost of Sales 48.70% 46.50% 73.90% 75.60% -60.60% -60.40%

Gross Profit 51.30% 54.10% 26.10% 24.40% 39.40% 39.60%

Operating Expense 43.40% 41.90% 1.90% 1.70% 16.50% 15.60%

Net and comprehensive

Income 6.10% 9.00% 1.40% 1.00% 33.80% 30.00%

FINANCIAL POSITION/

BALANCE SHEET

BEER

GUYS

BOOZE

HOUND

BREWSKY

LLC

2013 2012 2013 2012 2013 2012

ASSETS

Non-current assets

PPE 82.40% 76.20% 33.30% 41.90% 27.50% 26.40%

Current Assets

Cash and cash equivalent 0.10% 0.20%

Accounts Receivable 3.20% 5.10% 12.60% 11.40% 2.30% 2.60%

Inventories 7.00% 8.40% 8.50% 8.80% 4.80% 4.90%

Total Current Assets 17.4% 23.5% 29.3 21% 8.2% 8.6%

TOTAL ASSETS 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

LIABILITIES AND

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EQUITY

Non-current Liabilities 12.70% 17.10% 9.80% 14.00% 13.80% 15.70%

Current Liabilities 17.00% 13.60% 20.10% 22.50% 9.70% 9.80%

Total Liabilities 29.80% 30.70% 29.90% 36.50% 23.50% 25.50%

Total Equity 70.20% 69.30% 70.10% 63.50% 76.50% 74.50%

Total Liabilities and

Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

A vertical analysis of a financial statement is the relative analysis of that statement,

where each line is listed as a percentage of another item. On an income statement, every item is

stated as a percentage of gross sales and on the balance sheet, every item is stated as a percentage

of total assets. The vertical analysis percentage for cost of sales increased throughout the three

companies but was at the highest in Beer Guys, with 1.5%. This means that cost is rising

significantly and should be analyzed. The operating expense for all three companies increased

within one year, with Beer Guys being the highest with 1.5%. The net and comprehensive

income also reduced with Beer Guys by 2.9%. This suggests that management needs to take

steps to reduce costs in Beer Guy's industry. Total debt reduced in all three companies by 0.9%,

6.6%, and 2% respectively with Booze Hound having the highest percentage of debt reduction.

Gross Profit

In Millions of CAD

Booze Hound 31/01/2012 31/01/2013 % Change

Revenue 35,294,967 37,673,606 1.06739315

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Cost of Sales 26,674,244 27,857,161 1.044346786

Gross Profit 8,620,723 9,816,445 1.138703215

Gross Margin 24.42479405 26.05655801 1.066807685

Beer Guys

Brewery 31/01/2012 31/01/2013 % Change

Revenue 46,057 41,587 0.9029463491

Cost of Sales 21,149 20,260 0.9579649156

Gross Profit 24,908 21,327 0.8562309298

Gross Margin 54.08081291 51.28285281 0.94826335

Brewsky LLC

(In Millions CAD) 31/01/2012 31/01/2013 % Change

Revenue 7,761.10 7,800.80 1.005115254

Cost of Sales 4,689.70 4,723.70 1.007249931

Gross Profit 3,071.40 3,077.10 1.001855831

Gross Margin 39.57428715 39.44595426 0.9967571649

Gross profit refers to the company’s total revenue minus the cost of goods sold. Gross

profit is a company's total profit after deducting the costs associated with selling products or the

cost associated with providing services. As far as the gross margin is concerned the percentage

shows how much of every dollar of revenue is left after subtracting cost of goods sold. Food and

beverage companies in the US for the year 2015 had a gross profit margin range of -24.1% to

24.1% and this is a percentage in which the higher the percentage the healthier the company. In

addition to this, beverage companies tend to have an average profit margin of nearly 5.8% in the

U.S. Beer Guy’s brewery had the highest gross margin with 54.08% in 2012 and 51.28% in 2013

which was a slight decrease due to decreased sales. Brewsky had a gross margin of

approximately 40% during both years recorded, and Booze Hound experienced an increase in

gross margin from 24.4% to approximately 26% from 2012 to 2013. Using the U.S averages as a

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benchmark, the three companies in question have healthy gross profit margins but from an

investment point of view Beer Guys appears to be a smaller “start-up” like company which will

need more investment for growth unlike the other two companies.

Operating Profit Percentages

OPP Beer Guys

Brewery 31/01/2012 31/01/2013

Sales 46,057 41,587

COGS 21,149 20,260

General &

Administrative Exp 19,290 18,045

Operating Profit % 12.19792865 7.891889292

OPP Booze Hound 31/01/2012 21/01/2013

Sales 35,294,967 37,673,606

COGS 26,674,244 27,857,161

General &

Administrative Exp 6,971,418 7,770,727


OPP Brewsky (millions) 31/01/2012 21/01/2013

Sales 8,967 8,970

COGS 4,690 4,724

General &

Administrative Exp 1,829 1,770


Operating profit percentage refers to how well a company manages expenses; it

underlines the amount of revenue returned to a company once it has covered fixed and variable

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expenses except for taxes and interest. If operating margins are increasing a company is said to

be controlling cost and increasing profits to stimulate growth. If margins are above 25% this

shows financial efficiency and stability but margins below 15% to 20% indicate financial

vulnerability that can make it difficult for a company to fund growth. Beer Guys recorded an

operating profit percentage of 12% in 2012 which slid to nearly 8% in the following year which

shows reduced sales and a decline in the ability to cover fixed and variable expenses. As a

smaller company this is alarming because the company cannot afford to continue decreasing

sales, they need to stimulate sales to grow. It is important to note that Booze Hound is dealing

with significantly larger sales figures, cost of goods sold, as well as administrative costs in

comparison to the other companies which has a large impact on the operating profit percentage.

The operating profit percentage which rose from nearly 4.6% to 5.4% shows good cost control

leading to increased profits to stimulate growth.

Quick Ratio (Cash + Short-term investments + Net current receivables)/Current liability)

In thousands of CAD In millions of CAD

Beer Guys Brewery Inc. Booze Hound Brewsky LLC

31/01/

2012

31/01/

2013

31/01/

2012

31/01/

2013

31/01/

2012

31/01/

2013

Cash 4281 2317 Cash - - Cash 17.3 12.3

Short-term

investment - -

Short-term

investment 0

340640

0

Short-term

investment - -

Net A/R 2358 1353 Net A/R 5187785

586502

4 Net A/R 252 229.4

Current

liability 6318 7267

Current

liability 10272571

930192

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Current

liability 958.5 950.1

Quick ratio 1.0508

0.505

0 Quick ratio 0.5050 0.9967 Quick ratio

0.281

0 0.2544

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　　 The quick ratio is used to measure the company’s ability to pay all its current liabilities if

they came due immediately. It means that the quick ratio should be greater than 1. We can see

three companies almost under 1 during 2012 and 2013 except Beer Guys Brewery Inc. but Beer

Guys Brewery Inc. is getting worse and Booze Hound shows improvement. The market average

for the beer industry in the U.S is approximately 0.23 in 2015 and this means the 3 companies in

question are doing better than the current average. Beer Guy’s decrease in quick-ratio from

almost 1 in 2012 to 0.50 the following year can be explained by increased liabilities or decreased

sales. Booze Hound showed an improvement of the opposite nature which shows increased

stability and ability to pay all current liabilities. Brewsky declined marginally from 0.28 in 2012

but they are around the U.S market average.

Inventory Turnover (Beginning inventory + Ending inventory)/2)



31/01/

2012

31/01/

2013

31/01/

2012

31/01/

2013 31/01/2012 31/01/2013

COGS 21149 20260 COGS 26674224 37673606 COGS 4723.7 4689.7

Beginning

Inventory 1980 3892

Beginning

Inventory 4013375 4150400

Beginning

Inventory 452.2 481.5

Ending

Inventory 3892 2983

Ending

Inventory 3951436 4013375

Ending

Inventory 481.5 466

Ave.

Inventory 2936 3438

Ave.

Inventory 3982406 4081888

Ave.

Inventory 466.9 473.8

Inventory

turnover

7.203

3 5.8930

Inventory

turnover 6.6980 9.2293

Inventory

turnover 10.1172 9.8981

　　 Inventory turnover measures the number of times a company sells its average level of

inventory during a year. Companies generally want to sell inventory as quickly as possible. It

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indicates that the bigger the company’s inventory turnover is, the better their ability of selling

inventory is. It is important to note that if the amount is too high the amount may mean that the

company doesn't have enough inventory on hand to sell. Boozehound was the only of the 3

companies to increase inventory turnover and this can be attributed to significantly increased

units produced. The U.S alcoholic beverage industry mean for inventory turnover is about 9.63.

Brewsky perfectly represents this average for both years of financial statements and Booze

Hound records a turnover of 9.23 in 2013 which also brings them to the industry average. We

can assume Beer Guys sells their inventory at a faster rate due to the smaller economies of scale

they enjoy.

Days' Inventory Outstanding (365/inventory turnover)

Days' inventory outstanding 01/31/2012 01/31/2013

Beer Guys Brewery Inc. 50.6709537

1

61.92929418

Booze Hound 54.4936909 39.54728776

Brewsky LLC 36.0734699

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36.87202806

　　 Days’ inventory outstanding refers to how many days the companies will receive the cash

or receivables after they sell their inventory, in brief the smaller the number is the better liquidity

it is. Beer Guys days’ inventory outstanding increased from 2012 to 2013 which is different from

the other two companies. This could be attributed to companies taking longer to pay debts to the

company. Booze Hound managed to decrease days’ inventory outstanding which illustrates

accelerated payments into accounts receivable which is idea. Brewsky managed to maintain the

same position which shows stability.

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Accounts Receivables Turnover

Booze Hound 2012 2013Net Sales $ 35,294,967 $ 37,673,606Average Accounts Receivable $ 5,169,210 $ 5,526,405

6.83 6.82

Brewsky LLC 2012 2013Net Sales $ 7,761,100,000 $ 7,800,800,000Average Accounts Receivable $ 270,750,000 $ 240,700,000

28.67 32.41

Accounts Receivable Turnover is a ratio that measures a company’s ability to collect its

accounts receivables per year. The higher the ratio, the better off a company is because they are

able to collect their money at a higher rate than other companies. Out of the three companies;

Brewsky LLC exhibits the highest A.R. Turnover in 2013 at around 32 times in 2013. Booze

Hound and Beer Guys Brewery LTD fall short with ratios of: 6.8 (Booze Hound) and 22.4 (Beer

Guys Brewery LTD) respectively. It is evident that improvement in the ability to collect for

accounts receivable was shown by Beer Guys and Brewsky, because they both demonstrated an

increase in their Accounts Receivable Turnover ratios over the periods. Beer Guys Brewery had

a 14% (19.69 to 22.41) increase in their ability to collect on accounts while Brewsky increased

by 13% (28.67 to 32.41). Booze Hound was outside the trend; sticking with almost the same

A.R. Turnover ratio over the two periods with just a 0.1% decrease from 2012 to 2013. From the

statements, it can be confirmed that Brewsky LLC has the best/most efficient method at

collecting cash from their customers that choose to pay on credit.

Beer Guys Brewery Inc.2012 2013

Net Sales $ 46,057,000 $ 41,587,000Average Accounts Receivable $ 2,339,000 $ 1,855,500

19.69 22.41

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Debt Ratio (Current liabilities / current assets)



31/01/

2012

31/01/

2013

31/01/

2012

31/01/

2013

31/01/

2012

31/01/

2013

C.A 10895 7407 C.A 9497340 13618419 C.A 841.4 798.4

C.L 6318 7267 C.L

1027257

1 9301928 C.L 958.5 950.1

Debt ratio

0.579

9 0.9811 Debt ratio 1.0816 0.6830 Debt ratio 1.1392 1.1900

　　 Debt ratio measures the proportion of assets financed with debt. It also represents whether

the company is conservative or not. Brewsky LLC’s debt ratio is nearly 1. It indicates that debt

has financed all the assets. So Brewsky LLC will have great pressure on paying interest and

principal. As mentioned above, Beer Guys Brewery Inc. is more conservative by comparison.

Lower debt ratios of 0.4 or lower are considered better, a higher debt of 0.6 or higher makes it

difficult to borrow money. Debt ratios differ depending on the manner in which assets were

financed, but Booze Hound’s reduction in debt ratio from about 1.08 to 0.68 in 2013 is the most

positive of the ratios of the 3 companies.

Conclusion

To conclude after looking at all the financial statements and taking all the information

into consideration, it was decided that the company in the best position is Booze Hound for the

following reasons:

a.) Booze Hound has the highest percentage of debt reduction (6.6%)

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b.) Booze Hound revenue and gross profit went up by 6.74% and 13.87% respectively.

(Highest of the 3)

c.) Highest sales of the 3 companies and best economies of scale based on sales.

d.) Increased quick-ratio from 2012 to 2013 from 0.505 to approximately 1 which means

the company’s ability to pay all its current liabilities if they came due immediately has

increased.

e.) Managed to decrease days’ inventory outstanding from 54.5 to approximately 40.

Days’ inventory outstanding is important to how many days the companies will receive

the cash or receivables after they sell their inventory.

f.) Booze Hound had the lowest increase in Operating Expenses (0.2%) amongst the three

companies in one year.

g.) Boozehound was the only of the 3 companies to increase inventory turnover and this

can be attributed to increased demand for their product. Inventory turnover went from

6.69 to 9.22 which is the number of times the company sells their average level of

inventory during a year.

Ranking

1. Booze Hound

2. Brewsky

3. Beer Guys

The other two companies are perceived to be slightly riskier investments because:

a.) During the allocated time period Beer Guys experienced a decrease in net revenue of

9.71% as well as declines gross profit of 14.38 %, operating profit went down by

36.49% as well.

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b.) Brewsky experienced a slight increase in sales of 0.04% and gross profit increase of

0.72%.

c.) Beer Guys and Brewsky had declining quick-ratios during the years in question

showing inability to pay for all liabilities if they became due.

d.) Both Beer Guys and Brewsky have declining inventory turnovers for the two years in

question.

e.) Beer Guys has an increasing days’ inventory outstanding in the 2 years.

f.) Brewsky and Beer Guys had increasing debt ratios in the 2 years.

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