Analysis of the ratios for the current fiscal year -- implications as far as liq
ID: 2794460 • Letter: A
Question
Analysis of the ratios for the current fiscal year -- implications as far as liquidity, solvency, and profitability of the company, and efficiency of management. Discuss the change in the ratios between the two years analyzed as to whether the change reflects positively on the company and the financial statement item(s) that caused the change.
1
Current Ratio
Current Assets/Current Liabilities
1.25:1
1.32:1
2
Quick Ratio
Liquid Assets/Current Liabilities
17724/14133=1.25
16484/12524=1.32
3
Accounts Receivable turnover
Net Sales/Av. Acc. Rec, net
94595/19595=4.8
88519/19595=4.5
4
Inventory turnover
COGS/Av. Inventory
62282/12179=5.11
58254/12179=4.78
5
Days’ Sales uncollected
Accounts receivable, net/Net sales x365
2029/94595x365=7.83
1890/88519x365=7.79
6
Days’ sales in inventory
Ending inventory/COGS x365
769/62063x365=4.5
546/58081x365=3.43
7
Total asset turnover
Net sales/average total assets
94595/42469.5=2.23
88519/42469.5=2.08
8
Debt ratio
Total liabilities/total assets
23597/42966=.55
21315/41973=.51
9
Equity ratio
Total equity/total assets
4333/42966=.1
6316/41973=.15
10
Debt-to-Equity ratio
Total liabilities/total equity
1252+22345/4333=5.45
526+20789/6316=3.37
11
Times interest earned
Inc. before interest expense and income tax/interest expense
13,463/972=13.82
11940/919=13.0
12
Profit margin ratio
Net income/Net salesx100
7,957/94,595x100=8.41%
7009/88519x100=7.91
13
Gross Margin Ratio
Net sales-COGS/Net sales
94595-62282/94595=.34
88519-58254/88519=.34
14
Return on total assets
Net income/Avg. total assets
7,957/42469.5=.19
7009/42469.5=.16
15
Return on common stockholder’s equity
Net income- Preferred dividends/ Avg. common stockholder’s equity
7,957/5324.5=1.49
7009/5324.5=1.31
16
Book Value per common share
Shareholders’ equity applicable to common shares/Number of common shares outstanding
4333/1203=3.60
6316/1252=5.04
17
Basic Earnings per share
Net income- preferred dividends/ Weighted-Avg. common shares outstanding
(7957-0)/1234=6.45
(7009-0)/1283=5.46
18
Price-earnings ratio
Market price per common share/ earnings per share
4.48/6.47=.69
(7957/1776=4.48)
4.5/5.49=.82
(7957/1772=4.5)
19
Dividend yield
Annual cash dividends per share/market price per share
1.92/0.69=2.78 (3404/1776=1.92)
1.71/.69=2.48
(3031/1772=1.71)
1
Current Ratio
Current Assets/Current Liabilities
1.25:1
1.32:1
2
Quick Ratio
Liquid Assets/Current Liabilities
17724/14133=1.25
16484/12524=1.32
3
Accounts Receivable turnover
Net Sales/Av. Acc. Rec, net
94595/19595=4.8
88519/19595=4.5
4
Inventory turnover
COGS/Av. Inventory
62282/12179=5.11
58254/12179=4.78
5
Days’ Sales uncollected
Accounts receivable, net/Net sales x365
2029/94595x365=7.83
1890/88519x365=7.79
6
Days’ sales in inventory
Ending inventory/COGS x365
769/62063x365=4.5
546/58081x365=3.43
7
Total asset turnover
Net sales/average total assets
94595/42469.5=2.23
88519/42469.5=2.08
8
Debt ratio
Total liabilities/total assets
23597/42966=.55
21315/41973=.51
9
Equity ratio
Total equity/total assets
4333/42966=.1
6316/41973=.15
10
Debt-to-Equity ratio
Total liabilities/total equity
1252+22345/4333=5.45
526+20789/6316=3.37
11
Times interest earned
Inc. before interest expense and income tax/interest expense
13,463/972=13.82
11940/919=13.0
12
Profit margin ratio
Net income/Net salesx100
7,957/94,595x100=8.41%
7009/88519x100=7.91
13
Gross Margin Ratio
Net sales-COGS/Net sales
94595-62282/94595=.34
88519-58254/88519=.34
14
Return on total assets
Net income/Avg. total assets
7,957/42469.5=.19
7009/42469.5=.16
15
Return on common stockholder’s equity
Net income- Preferred dividends/ Avg. common stockholder’s equity
7,957/5324.5=1.49
7009/5324.5=1.31
16
Book Value per common share
Shareholders’ equity applicable to common shares/Number of common shares outstanding
4333/1203=3.60
6316/1252=5.04
17
Basic Earnings per share
Net income- preferred dividends/ Weighted-Avg. common shares outstanding
(7957-0)/1234=6.45
(7009-0)/1283=5.46
18
Price-earnings ratio
Market price per common share/ earnings per share
4.48/6.47=.69
(7957/1776=4.48)
4.5/5.49=.82
(7957/1772=4.5)
19
Dividend yield
Annual cash dividends per share/market price per share
1.92/0.69=2.78 (3404/1776=1.92)
1.71/.69=2.48
(3031/1772=1.71)
Explanation / Answer
Assuming that left hand side in the initial year and right hand side is the final year.
Liquidity
On the liquidity front, we see that Current ratio and quick ratio both have improved from 1.25 to 1.32. There seems to have been improvement in managing liquidity by the firm
Solvency
On the solvency front, we can observe that debt and debt to equity ratio have come down signalling cutting down on debt which is a good sign as equity has improved from 0.1 to 0.15. However, the times interest earned has come down by a small margin of 0.82 which though not alarming is a negative aspect.
Proftability
While the profit margins have come down, the Gross margin remains same. So it is the operating cost that have brought the margins down.
Efficiency of management
In the efficiency front, we see thatAccount receivable and Inventory turnover has come down signalling not such a good efficient management by the company. However the days sales uncollected has improved a little notch from 7.83 to 7.79 showing better account receivable terms with customers.
Return Ratios
Return on total assets and return on equity both have come signifying lower returns to shareholders and all capital holders. This was mainly due to dip in net profit margin and operating margins
Investment Ratios
While EPS has come down signifying lower earnings for shareholders, the BV per share and PE ratios have shown improvement over the previous year.
PS: All assuming that LHS is the initial year and RHS is the final year. If it is other way around, please interpret accordingly. :)
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