Question

Liquidity Current ratio 2014 = current assets/current liabilities 204,000/89,000 = 2.292 for 2014 and 230,000/90,000 = 2.555 for 2015

Quick Ratio = current assets-inventory/current liabilities 204,000-66,000/89000= 1.550 for 2014 and 230,000-75000/90,000 = 1.722 for 2015

Accounts receivable turnover Credit sales/average debts Average debt 75000+82000/2 = 78500 Total sales = 3,199,900/78500 = 40.76 times (2015)

Days sales outstanding = average accounts receivable/sales credit 78500/3199900 x 360 = 8.83 days (2015)

Inventory turnover 66,000+75,000/2 = 70,500

Inventory turnover ratio = cost of goods sold/ave inventory 31999900-2389417 = 810,429/70,500 = 11.495 times

Average days to sell inventory No of days in a period/inventory turnover ratio 360/11.495 = 31 days if use 365 day, the entire year it would be approximately 32 days.

Solvency

Debt to assets ratio = total liablities/total assets 140,000/248,000 = 0.56

Debt to equity ratio = total liabilities/total equity 140,000/108,000 = 1.03 Interest coverage ratio = earnings before interest and tax/interest expense 1,491,920/10,532 = 141.66

Plan assets to long term liabilities = plant assets (machinery and equipment/long term liabilities = 18,000/50,000 = 0.36

Profitability

Net margin ratio = Net income/total revenue = 962902/3199900 = 0.3

Asset turnover ratio = 31999000/248000 = 12.90

Return on investment = Net income/total assets = 962902/248000=3.88

Return on equity = Net income/total equity = 962902/10800=8.92

Using the above company ratios, write 200 words describing the company’s overall financial condition.

Answer 1

Tabulation of ratios is done as below:	2014	2015
Liquidity ratios:
Current ratio	2.292	2.555
Quick ratio	1.550	1.722
Accounts receivable turnover		40.76
DSO (days sales outstanding)		8.83
Inventory turnover		11.495
DSI (days sales in inventory)		32
Solvency ratios:
Debt to assets		0.56
Debt to equity ratio		1.03
Interest coverage ratio		141.66
Plant assets to long term liabilities		0.36
Profitability:
Net margin ratio		0.30
Asset turnover ratio		12.90
Return on investment		3.88
Return on equity		8.92
ANALYSIS:
Liquidity:
The current ratio and the quick ratio are well above the standard norms of
2 and 1 respectively. The ratio has also improved during the year 2015.
The DSO is only 9 days and should be considered a very satisfactory number.
The DSI seems to be higher at 32 days. However, these should be compared
with industry average to make a correct evaluation.
Solvency:
The debt equity ratio is reasonable indicating a nearly 1:2 debt - equity
proportion.
The interest coverage ratio is very high at 141.66
Further, Plant assets have been financed 64% by equity, which is a very healthy
solvency indicator.
Overall financial condition is good considering the strong liquidity and solvency
position.
Profitability:
The net margin ratio is 30%, which is high. So are the return on investment of 388%
and return on equity of 892%. (The latter two ratios seem to be too high; please
check the numbers)
However, this has to be compared with industry standards.