Question

In: Accounting

Current Ratio: Asset Turnover Ratio: Inventory Turnover Ratio: Days In Sales Inventory Ratio: Gross Margin Ratio:...

Current Ratio:

Asset Turnover Ratio:

Inventory Turnover Ratio:

Days In Sales Inventory Ratio:

Gross Margin Ratio:

Earning Per Share Ratio:

Discuss what each ratio indicates about company performance.

What does each ratio “tell” about a company?

Interpret the ratios and use the interpretation as a basis to analyze the operational effectiveness

.

Solutions

Expert Solution

Current Ratio = Current Assets / Current Liabilities

A ratio under 1 indicates that the company's debts due in year or less, are greater than its current assets. on the other hand, the higher the current ratio ,the more capable the company in paying its obligations.

Assets Turnover Ratio = Net Sales/ Average Total Assets

This ratio measures how efficiently a firm uses its assets to generate sales so higher ratio is more favorable. Higher turnover ratio mean the company is using its assets more efficiently.

Inventory Turnover Ratio = Cost Of Goods Sold / Average Inventory

Inventory turnover ratio is a measure of how efficiently a company can control its merchandise, so it is important to have a high turn.This shows the company does not overspend by buying to much inventory and wastes resources by storing non-salable inventory.

Days in sales inventory ratio = Average Inventory/ Cost of Goods Sold X 365 Days

OR

= I / Inventory Turnover Ratio X 365 Days

Days In sale inventory ratio is a measure of effectiveness of inventory management by the company. Since Days in Sale Inventory(DSI) indicates the duration of time a company's cash is tied up in its inventory, a smaller value of DSI is preferred.

Gross Margin Ratio = Gross Margin / Net sales

Gross margin ratio is a profitability ratio that measures how profitable a company sells its Inventory. It only makes sense that higher ratios are more favorable.

Earnings per Share Ratio = ( Net income - Preferred dividends ) / Weighted average common shares outstanding

Earnings per share is the same as any profitability or market prospect ratio. Higher Earnings Per Share is always better than a lower ratio because this means the company is more profitable and the company has more profits to distribute to its share holders.

ekkarill92 answered 1 year ago
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