Question

Part A: 1. For each of the following ratios determine if a series of "increasing" values indicates a positive (+) or negative (-) trend: Gross Profit Margin (GPM) Operating Profit Margin Net Profit Margin (NPM) Earnings Per Share (EPS) Return on Total Assets (ROA) Return on Equity (ROE) Price to Earnings Ratio (PE Ratio) Book Value per Share Market/Book Ratio Current Ratio (aka Working Capital) Acid Test Inventory Turnover Average Collection Period Average Payment Period Total Asset Turnover Average Age of Inventory Debt to Total Assets Debt to Equity Times Interest Earned Fixed Charge Coverage 2. The inventory turnover ratio for the Ajax Manufacturing Company was determined to be 6. What does a turnover of 6 mean? 3. If a company has a current ratio of less than one, what kinds of problems are suggested by this extremely low ratio? 4. What financial problems are suggested by a high debt/equity ratio? 5. The management of the Ajax Manufacturing Company realizes it is over stocked in finished goods inventory. What ratio could reveal this fact? In addition, what other tool could be used to detect the situation, especially as compared to previous years? 6. The management of the Ajax Manufacturing Company realizes that it has a problem collecting accounts receivable. Customers for the most part are paying but typically been paying a month late. What ratio could reveal this fact? 7. The management of the Ajax Manufacturing Company is concerned that the market value of its stock has declined in the past several months. What type of ratios will indicate this has happened?

Answer 1

1. 1. Current ratio: Increasing values of current ratio indicates a positive trend. 2. Acid test ratio: Increasing values of acid test ratio indicates a positive trend. 3. Inventory turnover: Increasing values of inventory turnover indicates a positive trend. 4. Average collection period: Increasing values of average collection period indicates a negative trend. 5. Average payment period: Increasing values of average payment period indicates a negative trend. 6. Total asset turnover: Increasing values of total asset turnover indicates a positive trend. 7. Average age of inventory: Increasing values of average age of inventory indicates a negative trend. 8. Debt to total assets: Increasing values of debt to total assets indicates a negative trend. 9. Debt to equity: Increasing values of debt to equity indicates a negative trend. 10. Times interest earned: Increasing values of times interest earned indicates a positive trend. 11. Fixed charge coverage: Increasing values of fixed charge coverage indicates a positive trend. 12. Gross Profit margin: Increasing values of gross profit margin indicates a positive trend

13. Operating Profit margin: Increasing values of operating profit margin indicates a positive trend 14. Net Profit margin: Increasing values of net profit margin indicates a positive trend. 15. Earnings per share: Increasing values of earnings per share indicates a positive trend. 16. Return on total assets: Increasing values of return on total assets indicates a positive trend 17. Return on equity: Increasing values of return on equity indicates a positive trend. 18. Price to earnings ratio: Increasing values of price to earnings ratio indicates a positive trend 19. Book value per share: Increasing values of book value per share indicates a positive trend 20. Market book ratio: Increasing values of market to book ratio indicates a positive trend.