Question

The following are important financial ratios. Explain the trends and meaning behind each ratio for the given years 2015-2018.

SNAP, INC. FINANCIAL RATIOS 2018 2017 2016 2015 LIQUIDITY CURRENT QUICK 5.7259 6.83538769 I 7.9554 0.25391463/ 1.77191442) 1.99548308 4.4322 4.3806 PROFITABILITY GROSS MARGIN RETURN ON ASSETS RETURN ON EQUITY 32.33% -46.2% -54.3% 13.030% -1.0122289 L -1.1513 -11.6638% -30.2836% -38.88% -210.8% -40.523%| -48.799% LEVERAGE RATIOS DEBT TO EQUITY INTEREST COVERAGE 0.2287 0.1744 0.01434511 0.30148847 -110.6235) -1002.1435 -366.37851 - CAPITAL STRUCTURE ASSET TURNOVER AR TURNOVER 0.4349 3.3255 0.2411 2.9518 0.2348 - 2.4867 -

Answer 1

1. Liquidity ratios

These ratios show the liquidity position of teh company to pay off its short term debts or periodical debts.

Currebt ratio is the ratio of current assets of the company to its current liabilities. If it is higher than 1, it means that the current assets are higher than the current liabilities. The higher the ratio, the stronger is the liquidity of the company. the current ratio increased substantially in the year 2016 amd then tend to decline whixh means that liquidity of company has decreased. However in the year 2018 also the ratio is high even after decline which shows that company has strong liquidity position.

Quick ratio is the ratio of current assets except inventory to the current liabilities. This shows how sufficient the current assets are to pay off the short term loabilities of company. The quick ratio declined substantiallybin 2016 and tends to decline. In the year 2018 it declined below 1 which means that presently the current assets of company are not sufficient enough to realise the amount for payment of liabilities.

2. Profitability ratios

These ratios show the capability of the company to earn profits for its investors.

The gross margin ratio shows percentage of profit earned each year. The gross margin ratio tends to increase every year. The company suffered high losses in the year 2015 which were recovered in the later yeaes and at present the company tends to earn high profits.

Return on asset ratio shows the contribution of assets of company in earning returns to investors. The negative return on assets show poor performance of assets of SNAP INC. The ratio shows increasing trend with a substantial improvement in 2017 showing good performance of assets but eventually the ratio declined in 2018 to a great level.

Return on equity shows the percentage of profits earned on investment. This ratio has been following same trend as that of return on assets. Initially the profits increased showing high improvement in 2017 but eventually the returns decreased substantially.

3. Leverage ratios

These ratios show the debt position of the company.

Debt to equity ratio shows the ratio of long term debt of the company to its equity. SNAP INC shows a fluctuating trend in its debt to equity ratio during past four years which means that the company has a fluctuating long term debt as a result of repayment and acquisition of debts.

Interest coverage ratio shows the ability of company to pay its interest expenses against its earnings. SNAP INC shows highly fluctuating trend in its interest coverage ratio. However during tha past three years the negative ratios indicate that the interest expenses are quite high for the company to pay aginst its EBIT.

4. Capital structure ratios

Asset turnover ratio shows the ability of company's assets to generate revenue. The asset turnover of company is showing an increasing trend which means that the company is efficiently using its assets to generate revenues and increase sales.

Accounts recievable turnover ratio shows the efficiency of mpany to mange its recievables against its credit sales.The company shows an increasing yrend towards its AR turnover whoch means that the recievables are efficiently collected by the company aginst its credit sales every year.