Question

If a business had the following data. What would be your overall assessment of the business and why? What additional information would you want to look at and why?

• A current ratio of 1.4
• Debt ratio of .8
• Number of days’ sales in inventory of 20
• Return on equity of 40%

Answer 1

1	A Current Ratio of 1.4 times signifies that the Current Assets are 1.4 times of its current liabilities which shows that the company is able
	to pay its short term obligations.
2	Debt ratio is the percentage of Total Assets which is owned by outsiders, the formula for Debt ratio is Total Liabilities / Total Assets.
	The Debt ratio of 0.80 suggests that the 80% of the Total Assets is owned by outsiders(like creditors). It shows that the company's owned
	Assets are just 20% which is not good for the solvency of the company
3	Days sales in inventory depicts the time taken by the company to convert its Inventory(Work in process or Finished goods) into sales.
	The Days sales here is 20 days which means on an average the company is taking 20 days to convert its inventory into sales.
	It goes to show that the company is not quite efficient as the less days sales in inventory shows the better effeciency of the company in managing its inventory
4	Return on equity of the company is 40%, it means that the company is earning a return of 40% on the amount invested by the company's shareholders.
	The more the ROE better it is for the investors. A ROE of 40% is pretty good and the investor are satisfied if only ROE is considered.
	Considering the above ratio the business solvency is not good and it is not that efficient too but it is earning a decent amount of return for its shareholders
	which shows that the business is operating effectively and generating good revenue
	The other factors which should be considered are the Profitability ratios like Gross Profit and Net Profit ratio.
	Also Debt to equity ratio is also an important ratio to assess the solvency of the company.