NAIT

11762 – 106 Street

Edmonton, AB, Canada
T5G 2R1

Arti Choke
5678 Main St
Edmonton, AB

December 02, 2021

Dear Arti,

This is regarding the business proposal of Conrad Mann to buy his business Fresh Thinking Ltd. for
$200,000. Me and my colleagues have provided a detailed analysis and description of the financial
status of business. We hope this will influence you in making an informed decision if whether you
should push through the purchase of the company.

Ratio Description and Analysis

Current Ratio The Current Ratio is a calculation we can do to determine the short-term
liquidity of a company – or in other words, their ability to pay short term
debts. In the case of Fresh Thinking Ltd, the results for 2019 were 1.9, and
for 2020 were 1.4. This shows us that for 2020, every one dollar the
company owed its creditors, it is owed $1.40 by its debtors. The ratio
worsened from 2019 to 2020. This is due to the liabilities increasing by
$46,542 in 2020 which appears to be caused by accounts and dividends
payable as well as unearned revenue all increasing a lot in 2020.
Quick Ratio A quick ratio is a more specific current ratio as it considers the current
assets that have a higher liquidity rate. Which means in simple terms its
assets such as cash, receivables, and short-term investments that can be
easily and quickly converted into cash. Unfortunately for Fresh Thinking,
the ratio decreased by 0.48 in 2020 from 2019. A ratio under 1.0 is not a
positive thing as it means expenses are consuming a lot of the current
assets (a deficit is probable in a situation like this).
Accounts Receivable The accounts receivable turnover ratio is how many times a company
Turnover collects its receivables in a year. The higher the ratio the better as it means
the more frequently the company is collecting which reduces the risk of
bad debts. For Fresh Thinking, their ratio is 4.57, and 4.18 for 2019 and
2020 (in that order). Their ratio decreased, meaning they collected their
receivables fewer times a year which can often result in a company
running themselves too thin and going bankrupt.
Average Collection The average collection period ratio measures the average number of days
Period between the date a sale is made (on credit) and the date that the buyer
submits the payment or the date that the company receives the payment
from the buyer. In the case of Fresh Thinking Ltd, the results for 2019
were 79.81 days (about 2 and a half months) and for 2020 were 87.29 days
(about 3 months). This shows that the company is not efficient as they
 took almost 3 months collecting payments or accounts receivable from
customers.
Inventory Turnover The inventory turnover ratio reflects how fast a company sells their
inventory and is used to measure sales and inventory efficiency. The
higher the inventory turnover the better. In the case of Fresh Thinking Ltd,
the results for 2019 were 1.5 times and for 2020 were 1.85 times. This
means that the company experiences weaker sales and declining demand
for the company's products or they may be overstocking due to buying
products in bulk and then selling at a discount when nearing expiration
date.
Days to Sell Inventory The days to sell inventory is a financial ratio that indicates the average
time in days that a company takes to turn its inventory, including goods
that are a work in progress, into sales. In the case of Fresh Thinking Ltd,
the results for 2019 were 197.09 days (about 6 and a half months) and
243.35 days (about 8 months). This indicates that the company may be
struggling to quickly turn its inventory into sales. This can be due to poor
sales performance or the purchase of too much inventory.
Debt to Equity Ratio The debt-to-equity ratio is a financial statistic that shows how much debt
and how much equity is applied to fund a company's assets. The debt-to-
equity ratio indicates the proportion of a company's assets financed by
debt rather than equity. Because debt shareholders have fewer claims on
the company's assets, a low debt to equity ratio signals less risk. The debt-
to-equity ratio tells us how much debt we have per $1.00 of equity. For
Fresh Thinking Ltd, their ratio is 1.94 for 2019 and 2.30 for 2020, which is
risky considering that any ratio above 1.0 indicates more debt than equity
—their ratio increases in 2020, which means the company's more
leveraged, implying greater financial risk.
Gross Profit Ratio The gross profit margin ratio is an indicator of a company's financial
health. It informs shareholders how much gross profit a company earns for
every dollar of revenue. A higher gross profit margin suggests that a
business may generate a decent profit from sales if overhead expenditure is
kept under control. As for Fresh Thinking Ltd, their gross profit ratio is
55% for 2019 and 35% for 2020. The company's gross profit dropped by a
considerable 20% in 2020. Gross profit declines are troublesome because
they indicate a drop in profitability. It is challenging to earn operating
profit and bottom-line net profit if a company does not achieve substantial
gross profit.
Profit Margin Profit Margin represents what percentage of sales has turned into profits.
Creditors, investors, and businesses all consider profit margins as
indicators of a company's financial health. Looking at Fresh Thinking
Ltd.'s profit margins, 2019 has 15.11% and 0.61% for 2020. It is safe to
say that they are losing money in 2020. With a 5% profit margin is
considered low, the profit margin of 2020 is terrible. A low profit margin
indicates that a company's cost structure and pricing methods are
inefficient. As a result, a low ratio can be caused by: Inefficient
management.
Return on Equity This ratio measures how efficiently a company is handling the money that
(ROE) shareholders have contributed to it. To put it another way, it measures the
profits made for each dollar from shareholders’ equity. The higher the
ROE the more efficient a company’s management is at generating income
and growth from equity financing. Looking at 2019 and 2020’s ROE, it
 made a big decline from 31% to 2% respectively. This is a sign that the
company did not do a great job at managing income from equity last 2020.
Return on Assets ROA is an indicator of how profitable a company is relative to its total
(ROA) assets. The higher the ROA, the better as it gives us an idea of how
efficient a company's management is at using its assets to generate
earnings. Once again, Fresh Thinking‘s ROA significantly weakened from
6.89% in 2019 to 0.38% in 2020. This means that the company almost
earned nothing from its assets last 2020, which is very alarming.
Earnings Per Share This ratio serves as an indicator of a company's profitability. The higher a
(EPS) company's EPS, the more profitable it is. In the case of Fresh Thinking
Ltd, they had an EPS of 0.99 last 2019. This means that for every one
share of a shareholder, they got an income of 99 centavos. While for 2020
their EPS has deteriorated significantly, they had an EPS of .05, meaning
shareholders received only 5 centavos of earnings for every share they
own. 2019 already had a small number but 2020 really worsened.

Furthermore, we have made some observations of the company in general:

1. The most obvious but not one that can go unsaid, is the fact that from 2019 to 2020 the number of
calculations proved that within a years’ time Fresh Thinking Ltd. was losing fast was more than the
“healthy” calculations. These negative fluctuations are major indicators of an un-healthy company.
This can be caused by the global COVID-19 pandemic that has affected all businesses. At times like
these especially, people in general do not have the luxury of engaging in business that Fresh Thinking
Ltd. can offer, which is selling wellness products and the new product which caters to sports
enthusiasts.

2. Conrad Mann may have said that they had the highest sales for 2020, but it does not cover up the
fact that their Net Income significantly worsened for that year too. From $29,714.00 from 2019 and to
$1,571.00 to 2020. This could be since the costs of the products sold were higher in 2020 than in 2019,
there were also other expenses listed in 2020 that resulted in lower net income for the company.

3. Performing common-size analysis on Fresh Thinking Ltd.’s Statement of Financial Position for the
years 2020 and 2019, we have noticed the following:
 Cash as a percentage of total assets decreased substantially from 8.82% in 2019 to 3.07% in
2020. A very alarming decrease because one year is a noticeably short time for a company to
lose cash that suddenly.
 Accounts receivable increased from 7.78% in 2019 to 10.18% to 2020. This could be a sign of
collections not being done successfully.
 Inventory increased from 19.21% in 2019 to 24.74% in 2020. A large number for inventory is
not always a good thing, especially if the inventory is something perishable, as is the case with
Fresh Thinking Ltd.

Overall, we advise that Fresh Thinking Ltd. is not worth buying, especially for $200,000. As sad as it
may seem, the company may be going into bankruptcy, which is why Conrad Mann is so eager to sell
it. We suggest you look at other companies that may interest you in terms of your passion for wellness
and self-improvement. If ever you come across that company, do not hesitate to contact us again for
our analysis and advice. Thank you for this opportunity.
Warm Regards,

Maria Jana Minela Ilustre

Joanna Fijer
Alannah Kessir
Ana Sidro