Question

Financial Ratio Worksheet
	2014	2015	2016	2017	2018
Days Receivable	75.47	80.31	63.69	78.74	76.59
Days Inventory	17.42	21.58	184.32	41.88	41.43
Days Payable	45.19	57.23	618.53	109.84	103.13
Sales Growth	-5.47%	-5.47%	-3.81%	-42.40%	6.86%
Costs of Goods Sold	71.63%	71.33%	7.00%	69.89%	69.88%
Sales & General Administrative to sales	15.81%	15.40%	15.60%	17.53%	16.03%
Operating Profit to Sales	6.92%	7.15%	2.11%	6.31%	3.35%
Current Ratio	1.11	1.41	1.28	1.13	1.00
Debt Ratio	0.77	1.42	1.53	1.62	1.61
Sales Turnover	0.85	0.64	0.63	0.47	0.56
Return on Equity	16.39	22.81	29.15	86.27	79.25
Return on Assets	0.03	0.02	0.01	0.00	0.00

Can you please help me interpret/analyse the trend from 2014 to 2018 for each of the ratios?

Answer 1

Days Receivable: The Debtors Collection Period of 65 to 80 days indicates that the debtors are allowed a credit of 65 to 80 days which may be considered normal for any general business. The trend of collection is more or less prompt. The days receivable drop in 2016 to 63.69 days but again it raised. So in 2016, the company makes faster collection from the debtors as compared to other years.

Days Inventory: The Days Inventory was low in the first two years but increased drastically in the third year. Again it was controlled in the next two years but still 41.88 and 41.43 indicated that the movement of stock is slow. The position might have arisen due to a faulty Purchase Policy. Overstocking may occur if it is not controlled.

Days Payable: It has increased by a huge margin in the last three years. This means the company is able to avail long duration credit from its suppliers. However repayment to the supplier after long period may indicate losing of the discount offered from the creditor.

Sales Growth: Sales has been drastically going down for the first four year with 2017 being the worst, as there were negative growth in sales. But the company has make better performance in 2018 by increasing sales by 6.86% as compared to sales in 2017. Focussed on better marketing techniques and price cutting methods should be made to increase the sales.

Cost of goods Sold: It is maintained at a stable rate with minor fluctuations. Only in 2016 it was low.

Sales & General Administrative Expense to sales: The ratio is stable and moderate. This expense is effectively utilised to generate sales.

Operating profit to sales: In 2014, 2015 and 2017 it is good which means the operational activities were efficiently and effectively performed.

Current Ratio: The standard expected ratio is 2, that is, the current assets should be double of current liabilities. The actual ratio is below 2. It indicates insolvency of the company. Its current assets are lower than its current liabilities resulting in a negative working capital.

Debt Ratio: It indicates total liabilities as a percentage of total asset. If it is low then it means that larger portion of shareholders’ fund is used to finance the company asset. Here it is low so the shareholders’ fund must be higher than its current and long term liabilities. The company is depending too much on its own capital.

Sales Turnover: It is very low during all the years. The company must take effective measures to increase its gross profit. The profitability of the business is not satisfactory.

Return on Equity: It is increasing continuously over the years. This will enhance the shareholders’ confidence and attract investors.

Return of Asset: It is very low and also decreasing continuously. The company is not able to utilise its assets to generate income. The company may be making unnecessary huge capital expenditure.

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