Bailey and Brothers has applied for a loan from the Me Too Bank in order to invest in several potential opportunities. In order to evaluate the firm as a potential debtor, the bank would like to compare Bailey and Brothers to the industry. The following are the financial statements given to Trust Us Bank
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Compute the following ratios for 2005 and 2006. The rating of poor, good, etc. indicates the relation of the company's ratio to the industry norm.
2005: = = 4.29 Poor
2006: = = 5.7 Good
In 2005, the firm could not pay off its debts as they fall due. However, in 2006 it was capable of paying off its debts as they fall due.
The trend increased, indicating success in current ratio.
Acid test ratio
2005: (current assets - inventories) / current liabilities = (1,180 - 600) / 275 = 2.11 times Poor
2006: (current assets - inventories) / current liabilities = (1,140 - 580) / 200 = 2.80 times Poor
In both 2005 and 2006, the firm could not pay off its debts without its inventories.
The trend increased. However, it is still lower than the industry average.
2005: sales / inventory = 1,100/600 = 1.83 times Poor
2006: sales / inventory = 1,330/580 = 2.29 times Good
In 2005, the firm's items have a low rate of turnover. In 2006, the firm's items have good turnover rate that is a bit higher than the industry average.
The trend increased, indicating success in inventory turnover and was higher than the industry average.
Average collection period
2005: accounts receivable / (sales / 365) = 275/ (1,100 / 365) = 91 days Ok
2006: accounts receivable / (sales / 365) = 290/ ...
The solution compares Bailey and Brothers to the industry using ratio analysis.