ABC Pharmacy - What can two new pharmacy owners learn about their business from its financial statements?
It has been a little more than two years since Angela Ramirez and Martin Bull purchased the ABC Pharmacy from Frank Strand, the previous owner and founder, who started the pharmacy in 1963. The two had spent many long hours in the store and had learned many valuable lessons as business owners that they had not had the opportunity to learn as employees of large chain pharmacies where they had previously worked.
Ramirez and Bull just received an e-mail from their accountant that contained the balance sheet and the in the income statement for ABC Pharmacy for the fiscal year that had just ended. The financial statements appear below.
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Balance Sheet, December 31, 2013
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Assets
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Current Assets
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Cash
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$74,473
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Accounts receivable
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$112,730
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Inventory
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$224,870
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Supplies
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$21,577
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Other assets
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$10,202
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Total Current Assets
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$443,852
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Fixed Assets
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Autos, net
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$33,156
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Equipment, net
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$35,706
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Furniture and fixtures, net
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$16,323
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Total Fixed Assets
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$85,185
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Total Assets
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$529,037
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Liabilities
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Current Liabilities
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Accounts payable
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$29,585
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Notes payable
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$70,902
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Line of credit payable
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$32,136
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Total current liabilities
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$132,623
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Long-Term Liabilities
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Note payable
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$170,880
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Loan
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$93,346
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Total long-term liabiities
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$264,226
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Owner's Equity
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Ramirez and Bull, capital
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$132,187
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Total liabilities and owner's equity
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$529,036
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Income Statement December 31, 2013
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Sales Revenue
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Prescription sales revenue
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$2,228,767
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All other sales revenue
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$167,757
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Total Sales
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$2,396,524
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Cost of Goods Sold
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Beg. Inventory, 1/1/2013
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$169,578
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Purchases
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$1,938,097
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Goods available for sale
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$2,107,675
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Ending Inventory, 12/31/2013
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$224,870
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Cost of Goods sold
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$1,882,805
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Gross profit
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$513,719
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Operating Expenses
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Utilites
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$10,305
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Rent
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$35,948
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Advertising
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$9,586
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Insurance
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$9,586
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Depreciation
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$5,033
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Salaries and benefits
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$321,134
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Computer and e-commerce
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$11,983
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Repairs and maintenance
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$28,758
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Travel
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$4,793
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Professional fees
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$3,595
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Supplies
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$5,991
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Total operating expenses
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$446,712
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Other Expenses
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Interest Expense
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$24,879
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Misc. expenses
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$374
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Total other expenses
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$25,253
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Total expenses
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$471,965
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Net Income
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$41,754
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To see how their pharmacy's financial position has changed since their first full year of operation, they want to calculate 12 financial ratios. They also want to compare ABC Pharmacy's ratios to those of the typical small pharmacy in the industry. The table below shows the value of each of the 12 ratios from last year and the industry median for small pharmacies.
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Ratio Comparison
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ABC Pharmacy
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Industry Median
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Current Year
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Last Year
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Liquidity Ratios
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Current Ratio
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3.41
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4.71
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Quick Ratio
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1.72
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2.42
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Leverage Ratios
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Debt Ratio
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0.70
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0.62
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Debt to net worth ratio
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2.23
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2.10
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Times interest earned ratio
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3.04
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3.90
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Operting Ratios
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Average inventory turnover ratio
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10.90
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11.70
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Average collection period ratio
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14.00
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15.00
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Average payable period ratio
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5.00
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14.00
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Net sales to total assets ratio
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4.75
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4.68
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Profitability Ratios
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Net profit to sales ratio
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1.94%
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2.90%
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Net profit to assets ratio
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9.20%
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8.20%
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Net profit to equity ratio
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29.21%
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48.00%
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Questions:
1.Calculate the 12 ratios for the ABC Pharmacy for this year.
2.How do the ratios you calculated for this year compare to those for the pharmacy last year? What factors are most likely to account for those changes?
3.How do the ratios you calculated for this year compare to those of the typical company in the industry? Do you spot any areas that could cause the company problems in the future? Explain.
4.Develop a set of specific recommendations for improving the financial performance of ABC Pharmacy using the analysis you conducted in questions 1 - 3.