Financial Ratio Analysis

a) A ratio is an expression of a mathematical relationship between one quantity and another. If a ratio is to have any utility, the elements which constitute the ratio must express a meaningful relationship. For example, there is a relationship between accounts receivable and sales, between net income and total assets, and between current assets and current liabilities. Ratio analysis can disclose relationships which reveal conditions and trends that often cannot be noted by inspection of the individual components of the ratio.

Ratio are generally not significant themselves but assume the significance when they are compared with (1) previous ratios of the same firm, (2) some predetermined standard (3) ratios of other enterprises in the same industry, or (4) ratios of the industry within which the company operates when used in this manner, ratios serve as “benchmarks” against which the company can evaluate itself. Ratios are not ends in themselves but help provide answers to questions concerning specific issues and insights into the operations of a business enterprise.

The five major categories of ratios are:

* Liquidity ratios

* Asset management ratios

* Debt management ratios

* Profitability ratios

* Market value ratios

b) Quick Ratio =

=

= 1x

Current Ratio =

=

= 1.85x

The company’s liquidity positions are, in 2007, since the current ratio is near the industry average so it could be possible that the company could still cover/pay its current liabilities. In 2008, the company’s current ratio dramatically decreased so its ability to pay its debts became crucial that the company had a hard time paying its current liabilities. In 2009, the company’s current ratio increased compared to last year because its current assets increase but still the company is facing difficulties in paying its current debts. And...