Desiree Smith

FINANCIAL RATIO ASSIGNMENT

1. Complete 10 (A,B,C,D,E) on page 108-109/111-112. Calculate and

interpret your findings. Round answers to two decimal places.

A. Current Ratio= 1,600,000/850,000=1.88 vs the industry average at

2.5 times.
Quick Ratio= [1,600,000-1,040,000]/850,000=0.66 vs the industry
average at 1.1 times.
Net working capital= 1,600,000-850,000= $750,000
Assessment: Comparing both current and quick ratios to the
industry’s average the liquidity is below average which means the
inventory isn’t moving quick enough or moving very slowly.

B. Average collection period= 320,000/ [3,000,000/365] =

320,000/8,219.78= 38.9 days vs industry average at 35days.
Inventory Turn Over Ratio=1,800,000/1,040,000=1.73 vs industry
average at 2.4 times.
Total asset turnover ratio= 3,000,000/2,400,000=1.25 vs industry
average at 1.4 times.

Assessment: Based on the data above, this proves that there is an

inventory problem seeing it is way below the industry’s average
and the collection period is higher than it should be based on the
industry average.
Desiree Smith

C. Times interest earned ratio= 340,000/117,800=2.89 vs industry

average at 3.5 times.
Total assets to stockholders’ equity ratio= 2,400,000/750,000=3.2
vs industry average at 3.0 times.

Assessment: The data shows that this company interest coverage

is very low which means his interest charges are high and the
equity ratio is higher than industry as well. The company has more
risks financially than an average firm.

D. Net profit margin ratio = 133,320/3,000,000=0.044=4.4% vs

industry’s average of 4.0%.
Return on investment ratio= 133,320/2,400,000=0.055=5.5% vs
industry average of 5.6%.
Return on stockholders’ equity ratio =
133,320/750,000=0.1778=17.78% vs industry’s average of 16.8%.

Assessment: The data above shows that the profit margin is

slightly above the industry’s average and investment ratio is
slightly below the industry’s average. The equity which is highly
greater than industry’s average shows that his leverage is too
high.

E. The company’s liquidity is low, and the inventory is moving too

slow which results in lower asset turnover. The company also has
a high financial risk. Unbelievingly, this company is above the
industry’s average compared to other companies despite all the
odds.