Question

LET'S BUY A NURSERY After years of saving, learning, investing, and preparing, you're ready to make the big leap and purchase an existing nursery. You've narrowed your choices to two: Plants 'n Growin' Things and When It Grows. As the next step, you will assess the ratios to further narrow your decision Plants 'n Growin' When It Grows Nursery Things Nursery Net income after taxes: $59,000 Return on Owners' Equity Net income after taxes: $209,000 Owners' equity: $390,000 Which nursery is doing better? Owners' equity: $130,000 Return on owners' equity: Return on owners' equity: Net income after taxes: $59,000 Net sales: $190,000 Return on sales: Return on Sales Which nursery is doing better? Net income after taxes: $209,000 Net sales: $980,000 Return on sales: Current assets: $289,000 Current liabilities: $178,000 Current ratio: Current Ratio Which nursery is doing better? Current assets: $499,000 Current liabilities: $388,000 Current ratio: Net sales: $190,000 Accounts receivable: $22,000 Accounts receivable turnover: Accounts Receivable Turnover Which nursery is doing better? Net sales: $980,000 Accounts receivable: $87,500 Accounts receivable turnover: Cost of goods sold: $121,000 Average inventory: $22,000 Inventory turnover: Inventory Turnover Which nursery is doing better? Cost of goods sold: $688,000 Average inventory: $90,000 Inventory turnover: After calculating the above ratios and determining which nursery is doing better in each individual ratio, which nursery are you most interested in? Why? What could be done for the ratio(s) that were not favorable to the nursery that you chose?

Answer 1

Things Nursery

Return on sales = Net Income $\div$ Net sales = 59000 $\div$ 190000 = 0.31

Current ratio = Current asset $\div$ Current liability = 289000 $\div$ 178000 = 1.62

Inventory turnover = Cost of goods sold $\div$ Average inventory = 121000 $\div$ 22000 = 5.5

Grows Nursery

Return on sales = Net Income $\div$ Net sales = 209000 $\div$ 980000 = 0.21

Current ratio = Current asset $\div$ Current liability = 499000 $\div$ 388000 = 1.28

Inventory turnover = Cost of goods sold $\div$ Average inventory = 688000 $\div$ 90000 = 7.6

  Things Nursery performs well in Return on sales and Current ratio. Grows Nursery performs well only in Inventory turnover. It is better to focus on Things Nursery as it generates better return on sales comparing to the other and it also keeps a decent no of current assets to meet the current liabilities.