Question

What would be the business risk associated with these ratios if there were a high increase?: GP Margin, Income Before Taxes to Owner’s Equity, Income Before Taxes to Total Assets, Sales to Long Term Assets, Sales to Total Assets, Sales to Working Capital

Answer 1

Answer to question

Ratio	Business risk associated with these ratios if there were a high increase
GP Margin	The higher the profit margin, the more efficient a company is but same time its dificult to assigned to single products or an entire company and its will not show actual usage of labour, material.
Income Before Taxes to Owner’s Equity	This ratio shows to investors how many dollars in profits each dollar of capital employed generates how efficiently a company can generate profits from its capital employed if this highly increased then its shown false picture of postion of company and investor may not interested in company
Income Before Taxes to Total Assets	The ratio is considered to be an indicator of how effectively a company is using its assets to generate earnings if this is very high then profit shown very high and assets is lower so wrong position of company even banker may not finance.
Sales to Long Term Assets	high ratio indicates the business has less money tied up in Long Term Assets for sales. And may result in bad debt.
Sales to Total Assets	if it will highly increased then current assest and non current assest in which proportion used its dificult to determine.
Sales to Working Capital	This ratio measuring the efficiency of company's working capital utilization in order to generate the certain level of sales. if very high then firm is being undercapitalized, or overtrading. Undercapitalized firms usually face problems with liquidity in case of major changes in business conditions. Low working capital turnover means that sales are not adequate to firm's working capital and company's sales are being generated through the unreasonably excessive use of the accounts receivable and inventories, which might cause bad quality debts and obsolete inventory