Financial Management

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% | Fair |

Return on assets | 6% | 9% | Low |

Receivable turnover | 12X | 16X | Low |

Inventory turnover | 5X | 10X | Poor |

Fixed asset turnover | 5X | 2X | Good |

Total asset turnover | 2X | 3X | Fair |

Current ratio | 3X | 2X | Good |

Quick ratio | 1X | 1.5X | Fair |

Times interest earned | 11X | 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.

The profit margin on sales is fair because it matches the industry average. The return on assets is 3% lower than the industry which is why I interpreted as low. Receivable turnover is 4% lower than the industry average which is why it’s low. Inventory turnover is 5% lower than the average and I consider that poor. Fixed asset turnover is 3X higher than the industry which is considered good and total asset turnover is 1X lower so it’s fair. Current ratio is 1x higher than the average which is considered good. Quick ratio is .5x lower which is why I considered it fair and times interest earned was 4 higher which is considered excellent.

An increasing profit margin is the main goal. This means that your company is improving efficiently. A business can use this information to improve performances by comparing to the industry average and this helps in two ways: increase revenue per sale and lower cost of goods sold. For example, the business can improve inventory turnover by increasing the demand for the product- this would include meeting with the marketing team. Another way would be to set a better price for products to increase the demand, this will boost sales and inventory turnover.