Question

analyse the following ratios for these two companies

		Fashion Forward	Dreams Design
	Profitability Measures
1	Profit margin	5.46%	3.9%
2	Return on assets	4.9%	4.8%
	Short-Term Liquidity Measures
3	Credit Ratios	1.1 of 1	1.4 of 1
4	Quick Ratio	0.98 of 1	1.01 of 1
5	AR TurnOver Ratio	14.3 times	20.6times
6	Average Collection Period	26 days	18 days
7	Inventory Turn over	12.9 times	15.7 times
8	Average Sales	28 Days	23 Days
	Long-Term Solvency Measures
9	Debt to Equity Ratio	0.95 to 1	0.77 to 1

Answer 1

Ratio analysis is the process of determining and interpreting numerical relationships based on financial statements.
A ratio is a statistical yard stick that provides a measure of the relationship between variables or figures. This
relationship can be expressed as percent (cost of goods sold as a percent of sales) or as a quotient (current assets
as a certain number of times the current liabilities).

Profit Margin = (Net profit/Net sales) *100

The ratio indicates the net margin earned on sale of 100/-

This ratio helps in determining the efficiency with which the affairs of business are being managed.

Fashion Forward :

Profit Margin =5.46%

This indicates the net margin of 5.46/- for every 100/- of sale

Dreams Design:

Profit margin =3.9%

This indicates a net margin of 3.9/- for every 100/- of sale.

Return on Assets

Return on Assets = (Net Income /Net Assets)*100

This indicates a net income earned for using every 100/- worth of net assets

Fashion Forward :

Return on Assets =4.9%

This indicates a net income of 4.9 /- for using 100/- of net assets

Dreams Design:

Return on Assets =4.8%

This indicates a net income of 4.8/- for using 100/- of net assets

SHORT TERM LIQUIDITY MEASURES

Credit Ratio

A credit ratio , basically is the percentage of your income that is taken up by your debt obligations.

Leverage ratios include debt/equity, debt/capital, debt/assets, and interest coverage. ... It helps credit analysts decide the ability of a business to repay its debts. Common leverage ratios include: Debt to assets ratio

Fashion Forward:

Credit Ratios =1.1 to 1

There are 1.1 /- of credit compared to 1/- of assets.The situation is not favourable to company as the financial risk is high

Dreams Design:

Credit ratios = 1.4 of 1

There are 1.1 /- of credit compared to 1/- of assets.The situation is not favourable  to company as the financial risk is high

Quick Ratio =(Liquid Assets/Current Liabilities)*100

This ratio is an indicator of Short term solvency of a company.How much liquid assets are there to satisfy the current debts are examined by this ratio.

Liquid Assets = Current Assets – Inventory – Prepaid Expenses.

Fashion Forward:

Quick Ratio=0.98

0.98/- liquid assets are there to satisfy 1/- of current debt.This position is not satisfactory

Dreams Design:

Quick ratio=1.01

1.01/- liquid assets are there to satisfy 1/- of current debt.This position of company is satisfactory.

Average Receivable Turnover ratio=Credit sales/Average accounts receivable

The ratio indicates the speed with which money is collected from the debtor.

Average receivable includes both the Debtors and Bills receivables during the period.

Fashion Forward:

AR Turnover ratio=14.3 times

Dreams Design

AR Turnover ratio = 20.6 times

Average Collection period =Months or days in a year/AR turnover ratio

This indicates the credit period allowed to debtor. An increase in credit period

Fashion Forward:

Average collection period =26 days

An average of 26 days credit period is being allowed to debtor

Dreams Design :

Average Collection period= 18 days

An average credit period of 18 days is being allowed to debtor

Inventory Turnover =Cost of goods sold during the year/Average inventory

This ratio indicates whether the investment in inventory is efficiently used and whether it is in proper limits and also the liquidity of inventory

High inventory turnover indicates brisk sales and vice-versa

Fashion Forward:

Inventory Turnover=12.9 times

Hence the company sold 12.9 times of average inventory during the period

Dreams Design:

Inventory Turnover = 15.7 times

The company sold 15.7 times of average inventory during the period

Average sales = Average Inventory/Cost of goods sold during the period)*365 days

The days sales of inventory is a financial ratio that indicates the average time in days that a company takes to turn its inventory, including goods that are a work in progress, into sales..

Fashion Forward:

Average sales = 28 days

The Company is taking 28 days to turn its inventory into Sales

Dreams Design:

Average sales=23 days

The company is taking 23 days to turn its inventory into sales

LONG TERM SOLVENCY RATIO

Debt-Equity ratio = Total Long - term Debt/Shareholder's Funds

The ratio is determined to ascertain the proportion between the ‘outsiders’ ‘funds and share-holders funds’ in the
capital structure of an enterprise. The term outsiders’, funds is generally used to represent total long-term debt.

The ratio may also be calculated for ascertaining proportion of long-term debt in the total long-term funds. In such
a case the ratio will be computed as follows:
= Total Long - term Debt/Total Long- term Funds.
The ratio is considered to be ideal if the shareholders’ funds are equal to total long-term debt. However, these
days the ratio is also acceptable if the total long-term debt does not exceed twice of shareholders’ funds

Fashion Forward

Debt-Equity Ratio =0.95 to 1

This indicates 0.95/- debt is present for every 1/- of share holder funds

This ratio is not acceptable for this company

Dreams Design

Debt-Equity Ratio =0.77 to 1

This indicates 0.77/- debt is present for every 1/- of share holder funds

This ratio is not acceptable for this company.