Ratio Current ratio Quick ratio Receivables turnover Inventory turnover Profit m
ID: 2335083 • Letter: R
Question
Ratio Current ratio Quick ratio Receivables turnover Inventory turnover Profit margin Asset turnover Return on assets Return on equity Price-earnings ratio Debt ratio Times interest earned Year 1 3.12:1 1.34:1 9.7 times 2.4 times 11 .4% 1.21 times 13.7% 28.5% 10.4 times 50.2% 9.6 times Year 2 2.96:1 1.02:1 10.2 times 2.3 times 12.6% 1.22 times 15.4% 29.3% 12.4 times 45.3% 13.0 times What does the calculation of each ratio represent? How does year one compare with year two, and what trend can be seen when 1. you compare the two years? Is the trend from year one to year two positive or negative? What are the possible reasons for the trend? What recommendations do you have for turning a negative trend to a positive 4 trend?Explanation / Answer
1) Current ratio represents the capability of the company to pay off the current liabilities/short term liabilities.
Quick ratio Current ratio represents the capability of the company to pay off the current liabilities/short term liabilities from the readily available cash or cash equivalents and Accounts Receivable.
Recaivables turnover represent the average time period within which the receivables are collected.
Inventory turnover represent the average time period within which the inventories are paid off.
Profit margin shows the percentage of profit against the sales of the company.
Asset turnover ratio measures the value of a company's sales or revenues generated relative to the value of its assets.
Return on Assets (ROA) measures the profitability of a business in relation to its total assets.
Return on equity ratio shows how much profit each dollar of common stockholders' equity generates.
Price-earnings ratio indicates the dollar amount an investor can invest in a company in order to receive one dollar of dividend.
Debt ratio measures the company's leverage. It shows the proportion of company's assets that are financed by debt.
Times interest earned ratio is a measure of a company's ability to honor its debt payments. It shows the amount available with the company to pay its debt liabilities (Interest).
2) If we compare two years, tredn which can be seen is positive overall. In some ratios though trend is negative. But overall trend is positive and this shows that the company has performed well in year two.
3) Trend from year one to year two is positive.
4) Possible reasons for such a trend:-
Company's positive performance
Company's high profits
Increase in share prices
Decrease in debt
5) Recommendations:-
Company is a good prospect
Company is profitable
Company is making good growth
Investment in the company is worthwhile.
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