Question

Look at the table below at the ratios for Steel and Grocery Stores and explain as much as you can the reasons for the differences in their ratios.

Steel and Grocery Iron Stores Current Ratio 1.7 1.1 Inventory Turnover 5.2 11.0 Total Asset Turnover 1.0 2.4 Debt Ratio 61.9 73.9 Days Sales Outstanding 46.2 9.1 Profit Margin 3.9 0.5 Return on Assets 3.7 1.2 Return on Equity 9.7 4.6

Answer 1

Current ratio=Current assets/Current liabilities. It is higher for Iron and steel because the sector needs to maintain high inventory levels. Grocery stores maintain less inventory as many items can be perishable

Inventory turnover is higher for grocery stores as they have to maintain low inventory and replenish it fast, so as to avoid soiling of perishable items

Again total asset turnover for grocery store is high because it has fast consumer goods which are sold again and again. Also the return margin is high due to various types of products. Iron and steel have nearly same product everywhere and the margins are low and hence less asset turnover.

Debt ratio is higher for Grocery stores as they need to add new products for their customers as the market is hetrogenous and there are variety of products. For Iron and Steel the products are less and there is not a higher need to introduce new product for which debt shall be incorporated.

Days Sales outstanding is considerably higher for Iron and Steel as the customer orders are large and upfront payment is difficult. On the other hand, grocery stores rarely sell the products on credit (Except for large orders which are less)

Profit margin is higher for Iron and Steel as there are fewer firms while grocery stores are highly competitive as there are many. For the same reason return on equity and return on asset for Iron and steel is higher.