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Boston Beer Company

Essay by   •  June 19, 2011  •  Case Study  •  1,111 Words (5 Pages)  •  1,815 Views

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The Boston Beer Company

The Boston Beer Company, Inc. produces and sells low alcohol beverages primarily in the domestic market, and in certain selected international markets under the trade mark names "The Boston Beer Company," "Twisted Tea Brewing Company" and "HardCore Cider Company." The Boston Beer Company is mostly known for producing Sam Adams, Sam Adams Light and other various styles of craft beer.

In my research, the ratios from chapters 16 and 17 that I could compute was the working capital, current ratio, acid-test ratio, inventory turnover ratio with the average sales period, and the debt to equity ratio.

Starting with the working capital, in 2005 the total was $60,450 and 2006 totaled $79,692. Working capital is the excess of current assets over current liabilities, it measures the company's ability to repay current liabilities using only current assets. Having sufficient working capital provides some sort of guarantee to short-term creditors that they will be paid by the company. Even though Boston Beer Company's working capital is at a decent amount and has increased in the past two years, large amounts are not free for the company. Working capital must be financed with long-term debt and equity, both of which can be expensive. To tell whether or not these figures are in favor of the company and analyzed correctly, you should use it in connection with the current ratio, the acid-test ratio and the inventory turnover.

The current ratio is a test of short-term debt-paying ability. In 2005 the current ratio for the company was 3.1 and in 2006 it was 2.94. I believe that the decline in the ratio could be due to eliminating slow selling products and other stagnant current assets along with an improvement in the financial situation. Generally, a current ratio is suppose to be around 2 on average, but the adequacy of a current ratio depends a lot on the make-up of the assets. It seems like The Boston Beer Co. is on the right track with its current ratio on the decline because most its assets consists of cash and cash equivalents.

Next, is the acid-test ratio. This is a test of short-term debt paying ability without having to rely on inventory, leaving only the more liquid assets to be divided by the current liabilities. In 2005, the acid-test ratio was 1.77 and in 2006 it was 1.97. Ideally, each dollar of liabilities should be backed by $1 of quick assets. The acid-test ratio for The Boston Beer Company is at a good level right now, its cash and cash equivalents and accounts receivable increased both years, it shows how the company is continuing to grow.

Another ratio is the inventory turnover ratio. This ratio measures how many times a company's inventory has been sold and replaced during the year. The BBC inventory turnover ratio is 7.89. Once I got that figure, I divided that by 365 days to get 46.3, which is the average sales period. The average sale period shows the number of days being taken on average to sell the entire inventory. An average sale period should be anywhere between 10 to 90 days. The 46.3 days that was calculated seems to be an excellent place to be, especially for a beer company because it can produce, bottle and transport product on-site.

The last ratio that I could compute was the debt-to-equity ratio. This measures the amount of assets being provided by creditors for each dollar of assets being provided by the stockholders. Long-term creditors are concerned with a company's ability to keep a sensible balance between its debt and equity. The BBC debt-to-equity ratio was in 2005 .38 and in 2006 was .42. Usually, anything between 0.0, which is no debt, and 3.0 are common. There was a slight increase, but not a substantial

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