Question

1. Consolidated Analysis:  Examine the financial ratios and information below for SportsWorld.  

(6 pts)

	SportsWorld Company Select Financial Information
	Ratio		2018	2017	2016
Liquidity	Current		4.48x	4.06x	3.48x
	Quick		1.47x	1.18x	0.96x
Efficiency	Average collection period		16 days	15 days	9 days
	Inventory turnover		1.2x	1.2x	1.3x
	Days payable outstanding		11 days	12 days	8 days
	Fixed asset turnover		9.74x	9.09x	8.85x
	Total asset turnover		1.50x	1.67x	1.82x
Leverage	Debt ratio		29.47%	34.04%	39.17%
	Long term debt to   total capitalization		14.09%	18.91%	22.33%
	Times interest earned		22.02x	19.00x	14.23x
	Fixed charge coverage		4.59x	4.47x	4.25x
Profitability	Gross profit margin		49.21%	49.39%	48.52%
	Operating profit margin		16.05%	15.86%	15.52%
	Net profit margin		9.73%	9.62%	9.41%
Returns	Return on equity		7.96%	7.91%	7.89%

From the list of five general performance categories below, select what you consider to be the two strongest categories and the one weakest category:

PROFITABILITY         EFFICIENCY          LIQUIDITY          LEVERAGE           RETURNS

Two Strongest Categories:                            One Weakest Category

                                                                                                       .

                           

                                      .                            

DESCRIBE your rationale here:

Answer 1

Solution:

Two Strongest Categories

LIQUIDITY :

The Current ratio indicates the liquidity of the company and the higher the ratio better the liquidity. Generally, the current ratio should be greater than 1.

Current ratio = Current Asset / Current Liability

The current ratio is 4.48 in 2018, 4.06 in 2017 and 3.48 in 2016

Hence we can say that the liquidity position of the company is good.

Similarly Quick ratio =( Current assets - Inventory ) / Current liability

Again this ratio is good as it is more than 1

Leverage

This ratio is good as debt ratio and times interest earned are very good .

Times interest earned ratio ( = EBIT / Interest) should be greater than 3 and here it is more than 22. That suggests that the company is generating 22 times of operating profit as compared to interest.

Similarly, the debt ratio is low at 29%.

Weakest ratio

Efficiency, profitability, and return are the weakest ratio, and return on equity is the weakest.

ROE is less than 8% and it is quite low.

ROE = Net Income / Equity

It suggests that the net income of the company is not that strong and it is evident by the low profitability ratio