Ratio Analysis

Ratio Analysis

Joshua J. Cuffee

Argosy University

Case Scenario

Calculate the following ratios in the chart below and interpret the results against the industry average. Give an interpretation of what the ratios calculations show and how the business can use this information to improve its performance, be sure to give all answers justification.

Ratio Calculations

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 | 12 | 16X | Poor |

Inventory turnover | 5 | 10X | Poor |

Fixed asset turnover | 5.4 | 2X | Good |

Total asset turnover | 1.8 | 3X | Poor |

Current ratio | 2.7 | 2X | Good |

Quick ratio | 1.3 | 1.5X | Fair |

Times interest earned | 11 | 7X | Good |

Ratio Interpretations

Profitability Ratios. When analyzing the profitability ratios this company has and equal return on their sales dollar to the industry average, both at three percent. Nonetheless, their return on assets at six percent (investments), is below the industry average nine percent. The best explanation for this happening is a slower turnover of assets then what normally happens within the industry. Basically the company turns over investments slower but then compensates for this by raising prices where they will earn more for each sales dollar made (Block, Stanley, Hirt, G., & Danielsen, B, 2014). The goal here would be to lower prices in hopes to turnover investments faster thus making the business a more sought after success.

Assets Utilization Ratios. This company collects its receivables slower than the industry average and can be seen by looking at the receivables turnover of 12x as compared to the industry average of 16X. In terms of daily collection, the company collects about every 30 days as compared to the industry norm of about 23 days, these are the time frames that customer accounts are on the books. Also,...