Question

		2017		2016
Current Ratio (Working Capital )		5.78		5.18
Quick Ratio		4.90		4.60
A/R Turnover		5.91		5.53
Inventory Turnover		104.96		92.72
Gross margin		68%		66%
Return on Sales		53%		52%
Return on Equity		9%		6%
Return on Assets		1%		1%

Compare ratio analysis to trends in financial ratios over time for illustrating their impact, providing examples to support your claims.

Answer 1

.A. LIQUIDITY

1.Current Ratio:

Working Capital=Current asset-Current liabilities

Current Ratio=(Current assets)/(Current Liabilities)

In this case current ratio increased from 5.18 to 5.78.This indicates that the current asset has increased relative to current liabilities. Working capital reduced. Increase in current ratio indicates increase in liquidity . The company is in a better position to meet its short term liabilities.

2. Quick ratio=(Quick Assets)/(Current Liabilities)

Quick assets=Cash+ Marketable securities+ Accounts receivable

Quick Ratio increased from 4.60 to 4.90. Immediate available cash(Quick assets) increased relative to current liabilities. This indicates that the company is in a better position to meet its immediate liabilities.

The overall liquidity has improved and we expect the company to meet its current and immediate liabilities better

.B OPERATING EFFICIENCY

3. Accounts Receivable Turnover=( sales)/(Average accounts receivable)

Accounts Receivable Turnover increased from 5.53 to 5.91. This indicates that efficiency of collection process increased and the accounts receivable in terms of days of sales decreased

4.Inventory turnover=Cost of goods sold/Average inventory

Inventory turnover increased from 92.72 to 104.96. Hence Average inventory decreased relative to cost of goods sold.

This indicates that efficiency of inventory management   increased and the inventory in terms of days of consumption decreased

The overall operations efficiency has improved and we expect the company to manage with lower working capital resulting in higher profitability.

C PROFITABILITY

5.Gross margin= Gross Profit/Sales

Gross Profit=Sales – Cost of goods sold

Gross margin increased from 66% to68%.

This indicates increase in gross profit relative to sales. The profitability at gross level increased

6. Return on Sales= Net Income /Sales.

Return on sales increased from52% to 53%.This means Net income relative to sales has improved indicating higher profitability.

7.Return on Equity=Net Income/Stockholders equity

Return on Equity increased from 6% to 9%.This indicates increased profitability and higher return to stockholders

8. Return on Assets= Net income/Total Assets.

Return on Assets remained constant at 1%.

This indicates that though there is increase in net income ,there was proportionate increase in total assets ,keeping the ratio constant. Efficiency of utilization of assets remains constant