Use of ratios in comparative business analysis
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1) Over the past year, M.D. Ryngaert & Co. has realized an increase in its current ratio and a drop in its total assets turnover ratio. However, the company's sales, quick ratio, and fixed assets turnover ratio have remained constant. What explain these changes?
2) Profit margins and turnover ratios vary from one industry to another. What differences would you expect to find between a grocery chain such a Safeway and a steel company? Think particularly about the turnover ratios, the profit margin, and the Du Pont equation.
3) How might (a) seasonal factor and (b) different growth rates distort a comparative ratio analysis? Give some examples. How might these problems be alleviated?
4) Why is it sometimes misleading to compare a company's financial ratios with those of other firms that operate in the same industry?
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Solution Summary
The Solution provides a brief response to the questions, including changes to ratios, differences in ratios between industries, seasonal factors that might affect a ratio analysis, and the comparison of ratios between companies within an industry.
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Over the past year, M.D. Ryngaert & Co. has realized an increase in its current ratio and a drop in its total assets turnover ratio. However, the company's sales, quick ratio, and fixed assets turnover ratio have remained constant. What explain these changes?
As we know that,
Current Ratio=(Current assets)/(current liabilities)
And,
Total Asset Turnover Ratio=Sales/(Total Asset)=Sales/(Current asset+Fixed asset)
As it's known that,
The sales, quick ratio and fixed asset turnover ratio are fixed, this means that a fixed sales and a decrease in total asset turnover ratio indicates that the total asset is increasing. Now as we know that the total asset includes the fixed asset and the current asset and the fixed asset turnover ratio is constant indicating that ...
Education
- MBA, Indian Institute of Finance
- Bsc, Madras University
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