Ratio Analysis

 

Solve the problem below, calculate the ratios, interpret the results against the industry average, and fill in the table on the worksheet. Then, provide an analysis of how those results can be used by the business to improve its performance.

Balance Sheet as of December 31, 2010

Gary and Company

Cash  

$45

 

Accounts payables  

$45

Receivables    

66

 

Notes payables 

45

Inventory

159

 

Other current liabilities 

21

Marketable securities

33

 

Total current liabilities

$111

Total current assets 

$303

 

 

 

Net fixed assets  

147

 

Long Term Liabilities

 

Total Assets  

$450

 

Long-term debt  

24

 

 

Total Liabilities 

$135

 

 

 

 

 

 

Owners Equity

 

 

 

Common stock

$114

 

 

Retained earnings

201

 

 

Total stockholders’ equity

315

 

 

 

Total liabilities and equity

$450

 

Income Statement Year 2010

 

 

Net sales

$795

Cost of goods sold 

660

Gross profit  

135

Selling expenses  

73.5

Depreciation

12

EBIT

49.5

Interest expense  

4.5

EBT

45

Taxes (40%)  

18

Net income

27

 

1. Calculate the following ratios AND interpret the result against the industry average:

Ratio

Your Answer

Industry Average

Your Interpretation
(Good-Fair-Low-Poor)

Profit margin on sales

 

3%

 

Return on assets

 

9%

 

Receivable turnover

 

16X

 

Inventory turnover

 

10X

 

Fixed asset turnover

 

2X

 

Total asset turnover

 

3X

 

Current ratio

 

2X

 

Quick ratio

 

1.5X

 

Times interest earned

 

7X

 

 

2. Analysis:

Give your interpretation of what the ratios calculations show and how the business can use this information to improve its performance. Justify all answers. Provide references.

 

 

Grading Criteria

 

Has correctly calculated the ratios.

 

Has correctly analyzed and interpreted the significance of the resulting ratios and suggested actions for improvement.

 

Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation

 

 

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