Question

Please interpret what its mean to the company/ firm when list below is lower and higher compared to the industry Ratio.

Current Ratio: lower than the industry means the company is ??? … higher than the industry means the company is ???  

Quick Ratio

Gross Profit Margin

CGS % Sales

NP % Sales

RR Assets

RR Net Worth

SAE % Sales

Inv. Turn..

Inv. Days O/S

A/R Turn

AR Coll

FA Turnover FAX

TA Turnover TAX

Thank you in advance!

Answer 1

Solution :

Current Ratio

• Current Ratio = Current Asset / Current Liability. This ratio is liquidity ratio and it tells that whether the company has enough current assets to cover current liability. Generally, a company seeks to have this ratio more than 1
• If this ratio is lower than industry average then it means that company has lower current assets Vs current liability as compared to industry and company may face liquidity issue more as compared to other companies. The opposite is true when the company has a higher ratio than the industry

Quick Ratio

• Quick ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities. This ratio is similar to current ratio but inventory has been reduced from current assets. This ratio says whether enough current assets other than inventory is available to cover current liability
• Lower ratio than the industry average means poor liquidity and higher ratio means better liquidity.

Gross Profit Margin

• Gross Profit Margin = (Sales -COGS ) / Sales. This ratio talks about how much percentage of sales is generated as gross profit
• If a company has a lower margin than industry then it means that they have higher Cost of goods sold which is not a good sign. If they have higher margin then it indicates that they have lower COGS and company generally seeks to have lower COGS

COGS ( Cost of goods sold ) % Sales

• This ratio is = COGS / Sales
• As explained earlier if the company has lower COGS% than industry then it means that they have lower cost then industry and it desirable and the opposite is true in case of higher COGS

NP % Sales or Net profit margin

• This ratio = Net profit / Sales . Net profit is the final profit after taking care of all the expenses
• Higher margin than industry means overall cost is low as compared to industry and lower margin means higher cost

Return on Asset

• ROA = net profit / Asset . This value talks about the profit generated per assets
• Higher value means this company is generating more net profit per assets as compared to the industry
• A lower value means this company is generating less net profit per assets as compared to the industry

Return on net worth or Equity

• ROE = net profit / Equity. This value talks about the profit generated per equity
• Higher value means this company is generating more net profit per equity as compared to the industry
• A lower value means this company is generating less net profit per equity as compared to the industry

SAE % Sales:

• Sales to Administrative expense: = Administrative expense / Sales. These expenses are the indirect expense and come after COGS
• A higher value is not good as it indicates a higher cost
• A lower value is good as the cost is lower and profit will be high

Inv. Turn. :

• Inventory turnover = COGS / Average Inventory
• Higher value than the industry is good as it shows how many times inventory is replenished
• A lower value means inventory is stuck for a longer time

Inv. Days O/S:

• Inventory days O/S = 365 / inventory turnover
• Highe value is bad as it says invenory is stuck for longer duration
• Lower value is good as inventory remains for shorter duration

A/R Turn:

• Account receivable turnover = Sales / Average Account receivable
• Higher value than the industry is good as it shows company has lower recievable and sales are made on cash mostly
• A lower value means higher sales on credit

AR Coll:

• A/R days = 365 / A/R turnover
• Higher value means A/R is collected after long days and it is not good
• Lower Days is good as credit is received in a shorter duration

FA Turnover FAX:

• FA Turnover = Sales / Fixed Asset
• Higher value means higher sales per fixed asset and assets are being utilized efficiently
• Lower value means less utilisation of fixed assets

TA Turnover TAX

• FA Turnover = Sales / Total Asset
• Higher value means higher sales per Total asset and assets are being utilized efficiently
• Lower value means less utilisation of Total assets