Question

		2020		2019
	Name of Ratio	Calculation	Ratio	Calculation	Ratio
1	Current ratio	39271 ÷ 48839	0.80	21760 ÷ 37930	0.57
2	Debt to total assets	54839 ÷ 116071	47.20%	37,930 ÷ 88160	43%
3	Gross profit rate	262931 ÷ 254375	54.10%	254375 ÷ 462500	55.00%
4	Profit margin	37002 ÷ 485625	7.60%	42000 ÷ 462500	9.10%
5	Return on assets	37002 ÷ 102116	36.2%	42000 ÷ 60670	69.2%
6	Return on common stockholders' equity	(37002 - 18000) ÷ 55731	34.1%	(42000 - 16800) ÷ 36705	68.7%

(a) Comment your finds from the above ratios.

(b) What impact would borrowing an additional $20,000 to buy more equipment have on each of the ratios in (a) above, assuming that no changes are expected on the income statement and balance sheet? Comment on your findings.

Answer 1

1. Current ratio is a measure of liquidity. The bigger the current ratio, the larger is the amount of rupees available per rupee of current liability, the more is the firm's ability to meet current obligation and the greater is the safety of funds of short term creditors.

conventionally, a current ratio of 2:1 (current assets twice current liabilities) is considered satisfactory although there is no hard and fast rule.

but in the given table current ratio is quite less in both year less than 1 which is not satisfactory.

2. Debt to Total Assets - This ratio indicates the relationship between creditor's funds and owner's capital can also be expressed in terms of another leverage ratio.

here the debt to total assets ratio is approx 1:1, which is satisfactory.

3. Gross profit rate - Gross profit margin measures the % of each sale rupee remaining after the firm has paid for its goods.

In the given case Gross margin seems satisfactory.

4. Profit Margin - Net profit margin measures the % of each sales rupee remaining after all cost and expenses including interest & taxes have been deducted.

Net profit margin in both years seems very low however gross margin looks satisfactory it means firm overheads are high.

current year ratio looks absolutely unsatisfactory.

5. Return on Assets - It measures the overall effectiveness of management in generating profits with its available assets.

ROA looks satisfactory in both years but it reduced very sharp in current (2020) year due to high assets.

6. Return on common stockholder's equity - It measures the return on the total equity funds of ordinary shareholders.

It looks satisfactory as the ratio is good but its % becomes down in current year(2020) due to raising in equity funds.

Final Comments - Firm short term solvency, that is its ability to meet short obligation is very low however other ratio is good.

(b) Debt to total assets ratio will be higher & Return on assets will be lower if you borrow an additional $20000.

so Net profit margin is not satisfactoty.

5. Return on assets -