Question

Here are the questions:

compute the following ratio, compare it to the industry average, and comment. Compute the current ratio.

compute the following ratio, compare it to the industry average, and comment. Compute the quick ratio.

compute the following ratio, compare it to the industry average, and comment. Compute days in inventory.

compute the following ratio, compare it to the industry average, and comment. Compute the ROE using the DuPont Model.

compute the following ratio, compare it to the industry average, and comment. Compute days outstanding in accounts.

compute the following ratio, compare it to the industry average, and comment. Compute the gross margin.

compute the following ratio, compare it to the industry average, and comment. Compute the net income percentage.

compute the following ratio, compare it to the industry average, and comment. Compute the long term debt to equity ratio.

compute the following ratio, compare it to the industry average, and comment. Compute the interest coverage.

compute the following ratio, compare it to the industry average, and comment. Compute the ROA.

compute the following ratio, compare it to the industry average, and comment. Compute the ROE.

James Trading Corporation

Balance Sheet

December 31, 20XX

Assets	$	Liabilities and Equity	$
Cash	23,015
Accounts receivable	141,258	Accounts payable	184,372
Inventory	212,444	Long term debt	168,022
Total current assets	376,717	Total liabilities	352,394
Net Plant and equipment	711,256	Common Stock	313,299
Other assets	89,879	Retained earnings	512,159
		Total equity	825,458
Total Assets	$1,177,852	Total Liabilities and Equity	$1,177,852

James Trading Corporation

Income Statement

December 31, 20XX

Income Statement	$
Sales	$2,130,000
Cost of goods sold	(1,015,000)
Gross margin	1,115,000
Operating expenses	(878,000)
Depreciation	(16,030)
Operating income	220,970
Interest expense	(10,011)
Earnings before taxes	210,959
Income taxes	(54,000)
Net income	$156,959

Industry Average Ratios

Item	Ration
Current ratio	2.1
Quick ratio	0.8
Days in inventory	92
Days in accounts receivable	63
Gross margin	23.9%
Net margin	12.3%
Long term debt to equity ratio	1.0
Interest coverage	5.6
ROA	5.3%
ROE	18.8%

Answer 1

Ratio	Formula		Value	Industry average	Comment
Current ratio	Current assets/current liabilities	376717/184372	2.04	2.10	James Trading's current ratio is less than the industry average and this means that the company's liquidity position is not as good as the industry and it has a lower ability to meet its current liabilities
Quick ratio	(Current assets - inventories)/current liabilities	(376717-212444)/184372	0.89	0.80	James Trading's quick ratio is less than the industry average and this means that the company's liquidity position is not as good as the industry and it has a lower ability to meet its current liabilities through its quick assets
Days in inventory	Inventory/COGS*365	212444/1015000*365	76.40	92.00	The value for the company is lower than the industry average and this is a good thing as the company is able to convert its inventory into cash sooner than the industry
ROE (Dupont model)	ROE = net profit margin*total assets turnover*1/(1-debt ratio)	(156959/2130000)*(2130000/1177852)*(1177852/825458)*100	19.01%	18.80%	The company's ROE is higher than the industry average and this means that the company has more profitable equity funds
Days outstanding in accounts	accounts receivables/sales*365	(141258/2130000)*365	24.21	63.00	The company has lower days in accounts receivables and this means that the company is collecting its dues more efficiently
Gross margin	gross profit/sales	1115000/2130000	52.35%	23.90%	The company's gross margin is much higher than the industry average and means the company is earning more after meeting its manufacturing costs
Net income percentage	Net income/sales	156959/2130000	7.37%	12.30%	The company's net margin is lower than industry average and this means that its non-manufacturing costs are higher as a percentage of sales
Long term debt to equity ratio	Long term debt/equity	168022/825458	0.20	1.00	The company's long term debt to equity ratio is much lower than the industry average and this means that the company provides a higher degree of protection to its creditors
Interest coverage	Operating income/interest	220970/10011	22.07	5.60	This means that the company's ability to meet its interest burden is much higher
ROA	Net profit/total assets	156959/1177852	13.33%	5.30%	This means that the company is employing its assets in a much more efficient manner than the industry
ROE	Net profit/total equity	156959/825458	19.01%	18.80%	The company's ROE is higher than the industry average and this means that the company has more profitable equity funds