Question

Ratio analysis is important to all businesses regardless of product or service sold. Each industry has averages benchmarks in which to compare your companys’ individual performance. Please think about and answer the following questions. Remember, these questions are asking for you to be creative and answer the question, ‘HOW’, I am looking for real possibilities that you might try to accomplish in ‘your’ company.

1. Choose EITHER a service or product that you are producing and selling. Tell me about your product or service company.

2. Your Accounts Receivable Turnover Rate is 4.7; are you please with this? Why or why not? What if anything will you do in the future to attempt to adjust this?

3. The Return on Equity is 11%, the Return on Total Assets is 8%. What does this tell me about the company? Is this a good situation to be in? Why or why not?

4. Explain how a vertical analysis and a horizontal analysis differ. Give examples of when you would use each one.

Answer 1

1) service company

My company is a chain of restaurants which provide foods at reasonable price to customers.

All variety of foods are available across the country , our aim is to serve fresh food and ensure that customer are satisfied.

2 ) Recievable management is key area of a business , there should be effective credit control department in place.

Recievable turnover of 4.7 is not a good indicator of recievable management , recievable turnover represent the ratio of sales to recievable , to be frank there should be higher turnover than 4,7

Company takes 78 days , (365 days/ 4.7 ) average to recover its due balance , there is a chance of baddebt and thereby loose in firms income . So we can clearly highlight than credit system us not effective.

course if action :

- ensure that there is effective followup of long period due balance and recover the balance earlier

- Ensure the customers are provided early payment discount to encourage customer to pay earlier

- Ensure that customers who are not paying wthin allotted time period are not allowded for trade furthur with our restaurant.

3) Return on equity is the earnings generated from equity invested. , where as return on asset denotes the return generated from asset invested.

ROE of11% and ROA of 8 % is a good indicator of restaurants operation. The company is in a good condition.

the rerestrestaurant should be more planned about its return generation otherwise it will be reduced due to competition in market.

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