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.

Assets
Current Assets
Cash	$74,473
Accounts receivable	$112,730
Inventory	$224,870
Supplies	$21,577
Other assets	$10,202
Total Current Assets	$443,852
Fixed Assets
Autos, net	$33,156
Equipment, net	$35,706
Furniture and fixtures, net	$16,323
Total Fixed Assets	$85,185
Total Assets	$529,037

Liabilities
Current Liabilities
Accounts payable	$29,585
Notes payable	$70,902
Line of credit payable	$32,136
Total current liabilities	$132,623
Long-Term Liabilities
Note payable	$170,880
Loan	$93,346
Total long-term liabiities	$264,226
Owner's Equity
Ramirez and Bull, capital	$132,187
Total liabilities and owner's equity	$529,036

Income Statement December 31, 2013
Sales Revenue
Prescription sales revenue		$2,228,767
All other sales revenue		$167,757
Total Sales		$2,396,524
Cost of Goods Sold
Beg. Inventory, 1/1/2013	$169,578
Purchases	$1,938,097
Goods available for sale	$2,107,675
Ending Inventory, 12/31/2013	$224,870
Cost of Goods sold		$1,882,805
Gross profit		$513,719
Operating Expenses
Utilites	$10,305
Rent	$35,948
Advertising	$9,586
Insurance	$9,586
Depreciation	$5,033
Salaries and benefits	$321,134
Computer and e-commerce	$11,983
Repairs and maintenance	$28,758
Travel	$4,793
Professional fees	$3,595
Supplies	$5,991
Total operating expenses		$446,712
Other Expenses
Interest Expense	$24,879
Misc. expenses	$374
Total other expenses		$25,253
Total expenses		$471,965
Net Income		$41,754

To see how their pharmacys financial position has changed since their first full year of operation, they want to calculate 12 financial ratios. They also want to compare ABC Pharmacys 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.

Ratio Comparison
	ABC Pharmacy		Industry Median
	2013	2012
Liquidity Ratios
Current Ratio		3.41	4.71
Quick Ratio		1.72	2.42
Leverage Ratios
Debt Ratio		0.70	0.62
Debt to net worth ratio		2.23	2.10
Times interest earned ratio		3.04	3.90
Operting Ratios
Average inventory turnover ratio		10.90	11.70
Average collection period ratio		14.00	15.00
Average payable period ratio		5.00	14.00
Net sales to total assets ratio		4.75	4.68
Profitability Ratios
Net profit to sales ratio		1.94%	2.90%
Net profit to assets ratio		9.20%	8.20%
Net profit to equity ratio		29.21%	48.00%

Questions:

Calculate the 12 ratios for the ABC Pharmacy for 2013.

How do the ratios you calculated for 2013 compare to those for the pharmacy in 2012? What factors are most likely to account for those changes?

How do the ratios you calculated for 2013 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.

Develop a set of specific recommendations for improving the financial performance of ABC Pharmacy using the analysis you conducted in questions 1 3.