Analyzing Stitches' Financial Health Using Accounting Principles

This report provides a financial performance analysis of Stitches after the completion of their financial statements. It focuses on analyzing the company's performance through ratio analysis, including net profit margin, gross margin, current ratio, quick ratio, and debt-equity ratio. The analysis reveals that Stitches has good financial performance across profitability, liquidity, and solvency. The report concludes with a suggestion to minimize operating expenses to further improve the company's net profit margin, given the significant difference between gross profit and net profit.

Running head: PRINCIPLES OF ACCOUNTING
Principles of accounting
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1PRINCIPLES OF ACCOUNTING
Introduction
Te report will focus on the financial performance of Stitches after completing the
financial statements for the company. After completing the financial statements the report will
focus on analysing the performances through ratio analysis. Finally based on the outcome the
report will provide suggestions to improve the company’s profitability (Sridharan 2015)
Financial statement analysis
 Net profit margin – net profit margin is computed to measure the company’s profit
earning capability from the revenue earned by it. Looking into the company’s net profit
margin it can be identified that the net profit margin of the company is 35.99%. It is
signifying that the company will have sufficient amount to return to shareholders after
meeting all the operational expenses (Cao, Chychyla and Stewart 2015)
 Gross margin – it measures the company’s capability in generating earning from the sales
revenue after paying for the expenses of cost of sales. Looking into the company’s gross
profit margin it can be identified that the gross profit margin of the company is 82.29%. It
is signifying that the company will have sufficient amount to meet all the operational
expenses
 Current ratio – current ratio represents the ability of the company to meet the short term
obligation with the current assets of the entity. Looking into the current ratio of the
company it can be observed that the current ratio of the company is 2.14. It is signifying
that the company is able to meet its short term obligation comfortably (Easton and
Sommers 2018.)

2PRINCIPLES OF ACCOUNTING
 Quick ratio – it is a liquidity metrics and does not consider the time taking current assets
for getting converted into cash. Quick ratio of the company is more 2.061 which is
signifying that the company is able to meet its short term obligation comfortably.
 Debt equity ratio signifies the debt and equity portion of the company’s capital structure.
It is identified that the debt equity ratio of the company is 0.42 that is signifying that the
company is lower leverages as major portion of the capital is raised through equity
(Robinson et al. 2015).
Conclusion
Based on the above interpretation it can be stated that the company’s financial
performance is good in all aspects like profitability, liquidity and solvency. However, to improve
further, it is suggested that the operating expenses shall be minimised wherever possible as it can
be identified that after earning 82.29% of gross profit it was able to earn only 36% of net profit.

3PRINCIPLES OF ACCOUNTING
Reference
Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement
audits. Accounting Horizons, 29(2), pp.423-429.
Easton, M. and Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
Sridharan, S.A., 2015. Volatility forecasting using financial statement information. The
Accounting Review, 90(5), pp.2079-2106.