Financial Analysis by Ratio

Financial Analysis by Ratio

Brian Stahr

FIN401A01

Argosy University

May 25, 2014

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 |  3.3% | 3% |  Good |

Return on assets |  6% | 9% |  Poor |

Receivable turnover |  12 | 16X |  Poor |

Inventory turnover |  5 | 10X |  Poor |

Fixed asset turnover |  5 | 2X |  Good |

Total asset turnover |  1.766 | 3X | Low |

Current ratio |  3.33 | 2X |  Good |

Quick ratio |  2.15 | 1.5X |  Good |

Times interest earned |  11 | 7X |  Good |

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.

Ratio calculations used for financial analysis fall into four categories. These are: Profitability, Asset Utilization, Liquidity, and Debt Utilization (Block, 2009). In this instance in profitability the profit margin is good, but the company is not generating enough sales to take full advantage of their assets as indicated by the Return on Assets ratio. This ties into a general issues with the Asset Utilization.

All of the turnover ratios in this example are performing below industry average and this indicates several issues. Keeping in mind that the turnover rates indicate how often inventory turns over yearly as well as the turnover of accounts receivable (Averkamp, 2014). These areas need to be improved and receivables by speeding up their collections. Additionally the Current Ratio and Quick Ratio indicate that there is additional funds that could be used to retire debt. The level above the industry average indicate that there are funds that are not being used to their best advantage.

The combination of the factors indicate the management of this organization is not performing in a manner that would best use the resources that are...