Analysis of various financial performance ratios
Analysis of Given Ratios. See attached file for full problem description.
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- Chap 24.doc
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MS Word file which contains the meaning and use of many of the financial ratios that are used to determine the financial and operational condition of an organization.
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- Chapter 24-5.doc
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- Chap 24.doc
E24-5 (Analysis of Given Ratios) Picasso Company is a wholesale distributor of professional equipment
and supplies. The company’s sales have averaged about $900,000 annually for the 3-year period
2006–2008. The firm’s total assets at the end of 2008 amounted to $850,000.
The president of Picasso Company has asked the controller to prepare a report that summarizes the
financial aspects of the company’s operations for the past 3 years. This report will be presented to the
board of directors at their next meeting.
1333
Exercises
(L0 3)
(L0 10)
(L0 10)
In addition to comparative financial statements, the controller has decided to present a number of relevant
financial ratios which can assist in the identification and interpretation of trends. At the request of
the controller, the accounting staff has calculated the following ratios for the 3-year period 2006–2008.
2006 2007 2008
Current ratio 1.80 1.89 1.96
Acid-test (quick) ratio 1.04 0.99 0.87
Accounts receivable turnover 8.75 7.71 6.42
Inventory turnover 4.91 4.32 3.42
Total debt to total assets 51.0% 46.0% 41.0%
Long-term debt to total assets 31.0% 27.0% 24.0%
Sales to fixed assets (fixed asset turnover) 1.58 1.69 1.79
Sales as a percent of 2006 sales 1.00 1.03 1.07
Gross margin percentage 36.0% 35.1% 34.6%
Net income to sales 6.9% 7.0% 7.2%
Return on total assets 7.7% 7.7% 7.8%
Return on stockholders’ equity 13.6% 13.1% 12.7%
In preparation of the report, the controller has decided first to examine the financial ratios independent
of any other data to determine if the ratios themselves reveal any significant trends over the 3-year
period.
Instructions
(a) The current ratio is increasing while the acid-test (quick) ratio is decreasing. Using the ratios provided,
identify and explain the contributing factor(s) for this apparently divergent trend.
(b) In terms of the ratios provided, what conclusion(s) can be drawn regarding the company’s use of
financial leverage during the 2006–2008 period?
(c) Using the ratios provided, what conclusion(s) can be drawn regarding the company’s net investment
in plant and equipment?
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