Question

The sales of an Australian company in 2019 total $400,000 and you have the following balance sheet for this company below:

Balance Sheet as at December 31, 2019
Cash	$14,500
Account receivable	$35,700
Inventory	$90,000
Total current assets	$140,200
Net non-current assets	$98,300
Total Assets	$238,500
Current liabilities	$122,500
Long-term debt	$35,800
Total liabilities	$158,300
Total equity	$80,200
Total Liabilities and Equity	$238,500

Calculate the following financial ratios and evaluate the company’s financial performance for each ratio compared to the industry benchmarks.

Financial ratios	Industry benchmarks
Current ratio = current assets/current liabilities	1.50
Quick ratio = (current assets – inventory)/current liabilities	0.75
Inventory turnover = sales/inventory	3.00
Debt ratio = total liabilities/total assets	50%
Total asset turnover = sales/total assets	1.50

Answer 1

Current ratio = Current assets/Current liabilities

Total current assets = $140,200

Current liabilities=$122,500

Current Ratio=140200/122500=1.14449 that's 1.14

Quick ratio = (current assets – inventory)/current liabilities

Total current assets $140,200

Inventory $90000

Current Liabilities=$122,500

Quick ratio=(140,200-90,000)/122500=.409796 that's .41

Inventory turnover = Sales/Inventory

Sales = 400,000

Inventory= $90,000

Inventory turnover Ratio=400,000/90,000=4.44

Debt ratio = Total liabilities/Total assets

Total Liabilities= $158,300

Total Assets= $238,500

Debt ratio=$158,300/$238,500=.663732 that's 66.37%

Total asset turnover = sales/total assets

Sales=$400,000

Total Assets=$238,500

Total Asset Turnover Ratio=400,000/238,500=1.677 that' 1.68

When compared to the industry benchmarks the company has a lower current ratio.The quick ratio of the company is significantly lower than the industry benchmark of .50(this indicates higher amount of inventory) and therefore a low amount of liquidity since inventory is not liquid.The Inventory Turnover ratio of the firm(4.44) is higher than the industry benchmark of 3.00.This indicates that the firm enjoys higher sales than it's peers.The debt ratio for the firm(66.37%) is higher than that of the industry benchmark.This indicates a significant portion of the firm's assets is financed by debt.The total Asset Turnover ratio is also higher than the industry average.The higher Total Asset turnover ratio is a testament to the fact that the firm is more efficient than it's peers in generating sales by the use of it's assets.