Explain how the ratio results in #7 are doing compared to the industry averages

Question

Explain how the ratio results in #7 are doing compared to the industry averages (peer mean).

Following is #7 ratios completed:

The following are the industrys peer average:

Current Ratio=Current assets/Current Liabilties Times Interest Earned 71455/8945 7.99 to 1 EBIT/Interest Expense Total Asset Turnover Ratio 8550/100 85.5 times Net sales/Total assets 25000/75455 0.33 times Net Profit margin ratio Net Profit/Sales*100 7605/25000*100 30.4 % Return on equity Net Income./Shareholder equity 7605/64510*100 11.8 % Return on asset Net Income/Average total assets*100 7605/75455*100 10.1 % Inventory Turnover ratio Cost of Good Sold/Average or closing inventory 11000/3100 3.55 times Debt To equity Ratio T0tal Liabilities/Total Equity 10945/64510 0.17

Explanation / Answer

1. Current ratio - This ratio enables the investors to determine if the companyis able to pay off its short term liabilities with ease. The industry average is 1.57, whereas the company's is at 7.99. A higher current ratio is better since the company is anle to pay off current liabilities with ease, however a very high current ration couls mean that the current assets are not being deployed efficiently and as a result the company is losing revenue

2. Total Asset turnover ratio : measures the company's ability to generate sales from its assets. Industry average is higher compared to that of the company whihc could mean that the assets are not being used effectively to generate revenue

3. Net profit of the company @30.4% is quite high compared to the industry average @3.75%. Looks suspicious

4. ROE - Industry average is higher @15.86 as against the 11.8% of the company. An average of 5-10 years' data would give a better picture of the company's performance

5. ROA - @10.1 its quite higher compared to the industry average of 4.67 whihc means the company is able to generate higher profits from the use of its assets better than others in the industry

6. Inventory turnover ratio : It measures how well the company has managed its inventory. The industry average is higher when compared to the company which could mean that the company is overspending on inventory by buying too much and wasting resources by keeping a higher stock

7. Debt equity : it shows the % of company's financing coming from creditors and investors. The industry average @0.78 is higher than that of the company @0.17, the company is not dependent on outside creditors and hence is avoiding debt coverage cost/ interest payments

8. Interest expense is low and the coverage is high when compared to others in the industry. The company is not very risky from a creditors point of view.

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