Question

3. The Susan and Susan, a retail clothier, has had average sales of $400,000 for the last five years, 2019-2015. The firm's total assets at the end of 2017 were $400,000. An internal staff cost analyst has prepared the following financial data from the annual reports. You have been hired as a consultant to help analyze the financial position. Current Ratio Acid Test Ratio Days' Sales in Receivables Merchandise Inventory Turnover Debt Ratio Times Interest Earned Sales as a Percent of 1996 Sales Net Income as a Percent of 1996 Income Gross Profit Margin Operating Expenses to Net Sales Net Profit Margin Return on Total Assets 2019 2.80 2.03 61 4.20 0.48 4.60 1.46 2018 2.43 1.93 58 4.10 0.50 4.80 1.23 2017 2.36 1.82 54 4.10 0.49 5.90 1.12 2016 2.10 1.61 42 3.90 0.47 5.70 1.06 2015 2.00 1.47 35 3.70 0.47 6.00 1.00 1.31 38.5% 11.4% 7.6% 9.4% 1.20 38.8% 11.3% 8.6% 9.6% 1.10 38.9% 11.5% 8.9% 9.6% 1.06 40.0% 11.4% 9.4% 10.0% 1.00 39.7% 11.7% 9.3% 10.7%

Answer 1

a) There are two types of liquidity ratios. current ratio and Acid Test Ratio. Current Ratio is the company's ability to pay its current obligations with its currnet assets. The current Ratio of the Company has increased substantially from 2.0 in 2015 to 2.80 in 2019. the Acid Test ratio is the ability of the firm to meet its current obligations with the its most liquid assets. The accounts receivable cycle is also increased from 35 i 2015 to 61 in 2019. So this has increased the current assets and there by the current ratio. The Merchandise Inventory turnover also increased from 3.70 in 2015 to 4.20 in 2019 which represents the number of times the invemtory is replaced to generate the sales. Thus may also affects the current ratio and quick ratio.

b) Debt to equity ratio and Interest Coverage ratios are the two solvency ratios used to measure the ability of the company to pay its debt obligations. Debt to Equity Ratio consists of both short term and long term liabilities. Times iNterest earned is used to measure the ability of the frim to meet its long term debt obligations. TImes Interest earned has gradually decreased over th eperiod from 6.0 in 2015 to 4.60 in 2019.

c) Net Profit Margin of Susan and Susan has decreased substantially even though the sales and income has increased from 1 in 2015 to 1.46 in 2019 , from 1 in 2015 to 1.31 in 2019, because the Gross profit margin has decreased in 2015 from 39.7% to 38.5% in 2019. This may be because of increase in Cost of Goods sold.

d) Dupont Analysis is used to know the performance of the company which measures operating effeciency, asset use effeciency and financial leverage. The total Asset effeciency is measured dividing the average sales by average total assets which is $400,000 / $400,000 = 1. Sussan and Susan has utilised its assets efficienty to generate the sales. But the effeciency can be measured based on the industry average which may change for each industry.

e) Operating expenses to net sales has slightly decreased over the period from 11.7% in 2015 to 11.4% in 2019 which may be because of increase in sales. Return on Total assets, the ability of the firm to generate revenue usng its total assets has decreased over the period from 10.7% in 2015 to 9.4% in 2019.