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    ABS Tire Company Financial Ratios

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    1. ABC Tire Company has grown a lot and has noticed that they are starting to take on a lot of debt in opening new retail installation locations. You are brought in as a consultant to analyze their financial situation. Look through the four types of financial ratios (liquidity, leverage, profitability, and market measure ratios). Briefly describe each type of ratio. Then figure out which type of financial ratios you would use to look at ABC Tires debt issues.

    2. Selected information from the comparative financial statements of ABCTire Company for the year ended December 31, appears below:

    2014

    2013

    Accounts receivable (net)
    $ 180,000

    $200,000

    Inventory
    140,000

    160,000

    Total assets
    1,200,000

    800,000

    Current liabilities
    140,000

    110,000

    Long-term debt
    400,000

    300,000

    Net credit sales
    1,330,000

    700,000

    Cost of goods sold
    900,000

    530,000

    Interest expense
    50,000

    25,000

    Income tax expense
    60,000

    29,000

    Net income
    150,000

    85,000

    There is no preferred stock and the tax rate is 30%.

    Required:

    Calculate each of the following for 2014:

    a. Debt ratio

    b. Debt-to-equity ratio

    c. Times interest earned ratio

    d. Gross margin percentage

    e. Return on assets

    f. Return on common stockholders' equity

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    https://brainmass.com/business/management-accounting/abs-tire-company-financial-ratios-603190

    Solution Preview

    1) A description of each type of ratio is provided below:

    Liquidity ratio—these ratios show if the company is able to fulfill its short-term debts. Hence, these ratios involve current assets and/or current liabilities.

    Leverage ratios—these ratios indicate how much of the company's funds were borrowed. These ratios are used to analyze a company's ability to pay debts back in the long term. Creditors may use these ratios to determine if a company is able to satisfy its debt obligations in the long term. A high leverage ratio could indicate that the company has an increased risk ...

    Solution Summary

    This solution provides a description of each type of financial ratio that has been provided. An explanation of which type of financial ratio is appropriate in a certain situation is given. Formulas and step-by-step computations have been provided.

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