Assess performance using financial statement and ratio analysis
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Assess organizational performance using financial statement and ratio analysis.
Financial statements for Lester Electronics are attached.
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Solution Summary
The solution assess performance using financial statement and ratio analysis for Lester Electronics.
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Please see the Ratios tab in the attached Excel spreadsheet.
2001 2002 2003 2004
Liquidity Ratios:
Current Ratio
Current Assets / Current Liabilities 2.20 2.50 1.47 1.49
Short-term creditors prefer a high current ratio since it reduces their risk.
Shareholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business. Typical values for the current ratio vary by firm and industry.
It calculates how many dollars in assets are likely to be converted to cash within one year in order to pay debts that come due during the same year.
Generally speaking, the more liquid the current assets, the smaller the current ratio can be without cause for concern.
For most industrial companies, 1.5 is an acceptable current ratio.
Companies that have ratios around or below 1 should only be those which have inventories that can immediately be converted into cash.
Comments on Lester:
As their Current Ratio has been consistently above 1, there should be no reason to be concerned about their liquidity.
Cash Ratio
Cash + Marketable Securities / Current Liabilities 1.22 1.20 0.62 0.41
The cash ratio is an indication of the firm's ability to pay off its current liabilities if for some reason immediate payment were demanded.
Asset Turnover Ratios:
Receivables Turnover
Annual Credit Sales / Accounts Receivable 5.40 4.56 6.28
Asset turnover ratios indicate of how efficiently the firm utilizes its assets.
Receivables turnover is an indication of how quickly the firm collects its accounts ...
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