Question

In: Accounting

1) Company's Current ratio 2017 Current ratio = 2.055 2016 Current ratio = 2.077 Explain what...

1) Company's Current ratio

2017 Current ratio = 2.055

2016 Current ratio = 2.077

Explain what information this ratio provides (define), and what the results mean specifically to your

company. Use complete sentences in your own words.

Has the current ratio improved?_________________________

2) Company's Debt ratio

2017 Debt Ratio =0.417987 = 41.799%

2016 Debit Ratio = 0.415240 = 41.524%

Explain what information this ratio provides (define), and what the results mean specifically to your

company Use complete sentences

Has the ratio improved? __________________

3) company Profit Margin

2017 Profit Margin Ratio = 0.232000663 =23.200%

2016 Profit Margin Ratio = 0.199640614 =19.964%

Explain what information this ratio provides (define), and what the results mean specifically to your

company. Use complete sentences.

Has the ratio improved? __________________

4) Return on assets

2017 Return on assets = 0.116538645 =11.654%

2016 Return on assets = 0.09205004 = 9.205%

Explain what information this ratio provides (define), and what the results mean specifically to your

company. Use complete sentences

Has the ratio improved? __________________

Solutions

Expert Solution

1) Company's Current ratio:

Meaning: The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations. The current ratio considers the current total assets of a company (both liquid and illiquid) relative to that company's current total liabilities.

The current ratio measures whether a company has the ability to use its current assets to pay its short-term creditors (current liabilities). A 2:1 ratio means a company is in good shape.

Current Ratio Trend:

In 2016, the company's current assets exceeded its current liabilities by 2.077 times. In 2017, the company's current assets exceeded its current liabilities by 2.055 times. In both years, the company has the ability to use it current assets (resources) to pay for its short-term debt (current liabilities).

The current ratio has decreased from 2016 to 2017. This means the company is becoming weaker and has relatively less current assets in relation to its current liabilities in 2017

2) Company's Debt ratio:

Meaning: The debt ratio is a financial ratio that measures the extent of a company's leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company's assets that are financed by debt.

The debt ratio measures the extent to which borrowed money has been used to finance a company's operation. Investors like to see a low debt ratio, since it shows a company is relying less on creditors (such as banks, suppliers, etc) to finance its operation.

A ratio of 1 (or 1 : 1) means that creditors and stockholders equally contribute to the assets of the business.

Debt Ratio Trend:

The debt ratio for 2016 is 0.415240 or in other words 41.524% of the company's assets are financed by creditors. From a dollar point of view, for every one dollar the company has in assets, it has 41.524 cents in debt. In 2017, the debt ratio is 0.417987. This means 41.799% of the company's assets are financed by creditors. Or, for every one dollar the company has in assets, it has 41.799 cents in debt.

The company's debt ratio is increasing. Therefore, the company is not paying off its creditors and also is increasing its credit limits and thus owns more money to the outsiders. This is an indication to say that the company is becoming weeker and not closer to "self sufficiency".

3) Company Profit Margin:

Profit margin is a profitability ratios calculated as net income divided by revenue, or net profits divided by sales. Net income or net profit may be determined by subtracting all of a company’s expenses, including operating costs, material costs (including raw materials) and tax costs, from its total revenue. Profit margins are expressed as a percentage and, in effect, measure how much out of every dollar of sales a company actually keeps in earnings. A 20% profit margin, then, means the company has a net income of $0.20 for each dollar of total revenue earned.

Profit margin of approximately 25% or better is considered favorable by most market analysts.

Net Profit Trend:

As you can see, the 2016 net profit margin is 0.199640614 or 19.964%. This means, for every $100 generated in sales, $19.96 remain in the company or is available to be distributed to the owners of the company or both.

In 2017, the company net profit margin is 0.232000663 or 23.20%. This means, for every $100 generated in sales, $23 remain in the company or is available to be distributed to the owners of the company or both.

The net profit margin has increased from 2016. This means the company's management team is improving its price setting policies and/or reducing their production costs and operating expenses. At any rate, a higher profit margin indicates the company is becoming stronger.

4). Return on assets:

Return on assets (ROA) is a financial ratio that shows the percentage of profit a company earns in relation to its overall resources. It is commonly defined as net income divided by total assets. Net income is derived from the income statement of the company and is the profit after taxes.

The Return on Total Assets ratio measures how well a company is using its assets to generate after tax profits (net income after taxes). Investors like to see a high return on total assets since it indicates a company is using its assets efficiently to generate after tax profits.

Return on Total Assets Trend:

As you can see, the company's 2016 return on total assets is 0.09205004 or 9.205%. This means, for every one dollar ($1.00) spent on purchasing assets, the company generated 9 cents in after tax profits. The after tax profits (net income after taxes) may remain in the company or may be distributed to the owners of the firm or both.

In 2017, the company net profit margin is 0.116538645 or 11.654%. This means, for every one dollar ($1.00) spent on purchasing assets, the company generated 11 cents in after tax profits. The after tax profits may remain in the company or may be distributed to the owners of the firm or both.

The return on total assets has increased from 2016. This means the company's management team is using the assets more efficiently to generate after tax profits. Moreover, a higher return on total assets indicates the company is becoming stronger.


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