Question

QUESTION 9

1. The following data were computed based on Ross Company’s performance in the current and previous years. Industry performance data are presented as well.

	20x6	20x5	Industry
Current ratio	1.80	2.20	1.50
Quick ratio	0.92	1.13	0.90
Days sales outstanding	18.55	18.80	18.00
Inventory turnover	10.00	10.70	12.00
Total asset turnover	2.00	2.30	2.40
Working capital turnover	13.30	14.50	11.80
Gross profit margin	25%	27.4%	29.3%
Net profit margin	5%	5.8%	6.5%
Return on total capital	19.4%	21.1%	22.4%
Return on common equity	21.1%	24.1%	19.8%
Debt-to-equity	80.9%	99.4%	35.7%
Interest coverage	7.00	5.90	9.20

2. Mike, Belle, and John made the following conclusions regarding Ross:

Mike	Total asset turnover is slightly lower than last year and the industry average. The current ratio indicates lower liquidity levels compared to last year and more liquidity than the industry average.
Belle	Inventory management by the company is efficient, as evidenced by its inventory turnover. Its DSO is higher than industry benchmarks, despite being a bit lower compared to last year’s.
John	Working capital turnover is lower than last year but still above industry average. The quick ratio is lower than last year and is in line with the industry average.

3. Who among the three is least likely to be accurate?

	a.	Mike
	b.	Belle
	c.	John

Answer 1

Total asset turnover states the efficiency of the company is using the assets for generating sales. The higher the ratio the better the company is in managing its assets

The total asset turnover of the company reduced from 2.30 to 2 and is less than the industry average of 2.40.

Current ratio is the current assets available to repay the current liabilities. Higher ratio means company is highly liquid and is able to pay its current liabilities.

The current ratio of company has reduced from 2.20 in 20x5 to 1.80 in 20x6 though it is higher than the industry standard.

Therefore, Mike's conclusion on the company is correct.

Inventory turnover ratio represents the number of times the company converts its inventory into sale. The higher the ratio the more efficient the company is in managing its inventory.

The inventory turnover ratio of company reduced in 201x6 as compared to 20x5 from 10.70 to 10. Also the inventory turnover ratio of industry is higher.

Therefore the company is not as efficient to manage its inventory as compared to industry.

Days sales outstanding refers to number of days it takes for the company to collect cash from its customers. The lower the number of days the more efficient company is in collecting its debt.

The days sales outstanding slightly reduce in 20x6 as compared to 20x5 from 18.80 to 18.55. However, the days sales outstanding is higher than the industry average and so company will have to improve its days sales outstanding.

Therefore, Belle's conclusion on the company are not accurate.

Working capital turnover reprents the use of working capital to generate sales. The working capital turnover is higher than the industry average. However in 20x6 the working capital turnover reduced from 14.50 to 13.30

The quick ratio compares quick assets with the current liabilities to verify whether the company has sufficient quick assets to repay the current liabilities.

Higher the quick ratio the more the company is liquid. The quick ratio of the company is higher than the industry average which is good indicator of company's liquidity.

The quick ratio in 20x6 reduced from 1.13 to 0.92.

Therefore, John's conclusion on the company are correct.

Therefore, Belle's conclusions are least likely to be accurate