2014 2015 2016 In AVG Current ratio 1.4 1.6 2.3 1.6 Quick/liquidty ratio 1 0.8 1
ID: 2565666 • Letter: 2
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2014 2015 2016 In AVG Current ratio 1.4 1.6 2.3 1.6 Quick/liquidty ratio 1 0.8 1.7 1.4 Inventory turn over ratio 5.7 4.2 6.1 12 Aveg collection period days 40 43 49 47 Avg collection period 39 37 49 46 Total asset turnover ratio 1.4 1.6 1.6 20 Debit ratio 41.1 50.1 53.1 29 gross profit ratio 40.1 41.1 43.1 42.5 Look at the definition of ratio? interpret given ratio by considering the definition?(on the basis of liquidity,efficiency, debt,profitability) 2014 2015 2016 In AVG Current ratio 1.4 1.6 2.3 1.6 Quick/liquidty ratio 1 0.8 1.7 1.4 Inventory turn over ratio 5.7 4.2 6.1 12 Aveg collection period days 40 43 49 47 Avg collection period 39 37 49 46 Total asset turnover ratio 1.4 1.6 1.6 20 Debit ratio 41.1 50.1 53.1 29 gross profit ratio 40.1 41.1 43.1 42.5Explanation / Answer
Current Ratio
By definition, current ratio is the ratio that helps in determining the business’s ability to meet its short term obligation. This is calculated by dividing the current assets by current liabilities. The more it is, the better it is. However, too much is also not good as it means that the current assets are not being used properly.
In this case, the company’s Current Ratio is gaining strength with every passing year and has reached to 2.3 by 2016 from 1.4 in 2014; which indicates that the management of the company has really worked on short term assets and liabilities which has done very well in their favor.
Quick ratio
This is another measurement of company’s ability to meet short term liability. It is also known as acid test ratio and ideally 1.5 times the quick assets than current liabilities is considered robust. There is a slight difference between quick ratio and the current ration in the manner that quick assets removes inventory as it is not possible to convert inventories to cash so quickly.
In this case as well, the quick ratio started with perfect 1 in 2014, then dipped to 0.8 in 2015 and then rebounded splendidly to 1.7 in 2016. This again shows the hard work and commitment of the management team to keep the liquidity ratios in good shapes so that the company is always in a comfortable situation.
Inventory Turnover ratio
This is an efficiency ratio which means that this ratio measures the efficiency of the business in managing its inventory vis-à-vis its cost of goods of sold. This ratio is calculated as Cost of Goods sold divided by average inventory. The higher it is, the better it is.
In this case as well, the ratio is having up and down swing from 5.7 in 2014 to 4.2 in 2015 and again 6.1 in 2016. No doubt the company has done well, but still it is just half the average or the industry. So, they really need to gear up to catch the average industry standards.
Average collection period & average collection period days
These two ratios are again the efficiency ratios and exhibits the management’s ability to collect the debt created out of credit sales in the shortest possible time. The lesser it is, the better it is. The calculation of average days of collection are calculated by diving the 365 days of the year by the debtors turnover ratio (sales / average receivables). This ratio is quite crucial as it decides the number of days in which credit sale is converted to cash and the cycle of O2C (Order to Cash) is competed.
Here the company is not doing well as the number of days have increased considerably from 2014 to 2016. The company needs to relook regarding the credit policy and debt collection follow ups.
Total assets turnover ratio
This is again an efficiency as well as turnover ratio which is quite important in the sense that this ratio calculates the ability of any business to generate the sales with its available total assets.
Here, in this case, the company’s assets turnover ratio is not very good when compared with the industry average. In fact, it can be said to be pathetic when compared with the industry average of 20.
Debt Ratio
Debt ratio is the solvency ratio where the ratio between the debt and the own stock or common shareholding is see. This is an important ratio to judge the overall capital gearing of the company or the percentage of the overall capital of the business that is financed by the debt or the interest bearing funds. There is no perfect ratio for the same but varies from industry to industry and the ability of the firm to take risk.
In this case the firm is heavily dependent on the outsider’s fund to the tune of 53% in 2016 which means not only the company has to service huge interest cost but also have future obligation in the form of repayment of loans. The average industry ratio is just 29%
Gross Profit Ratio
The GP ratio is the basic profitability ratio which calculates the gross profit in comparison to the net sales and measures the operational efficiency of the business. It also indicates the efficiency with which the company manages its stock and the direct costs associated to the cost of goods sold.
The company is more or less is in par with the overall average industrial benchmark and shold try to maintain the same if can not improve the same.
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