Question

In 200 WORDS American Apparel: Drowning in Debt? create a chart. Please type

1Calculate the current ratio, debt ratio, profit margin, and inventory turnover of the company.

2• Explain what each calculated ratio tells you about how well (or poorly) the company is performing.

Answer 1

1. Current Ratio

Current ratio is calculated by dividing company's current assets by current liabilities. This ratio is used by creditors of the company to assess the company's ability to pay-off its current liabilities.

Higher current ratio reflects higher ability of the company to pay-off its current liabilities and vice-versa.

2. Debt ratio

Debt ratio is calculated by dividing total monthly debts with gross monthly income. Lower debt ratio is considered to be good debt ratio. The reason being lower debt ratio is good ratio is that it reflects less debt in comparison to the income which is a good sign for the company.

3. Profit margin ratio

This ratio shows the amount of company's sales left after all the business expenses are met or paid off. It is calculated by dividing the company's profit by its revenue.

Higher the profit margin ratio reflects high performance of the company and vice-versa.

4. Inventory Turnover ratio

It indicates the number of times a company sells and replaces its stock in a particular period of time. It is calculated by dividing Cost of goods sold by the average inventory for the same period.

Lower inventory turnover ratio reflects good business by the company.