RATIO ANALYSIS

By Kevin O’Toole

Ratio Discussion Current Ratio-this is the current assets over current liabilities. This ratio

should be approximately 2:1. Seemingly, the higher the ratio, the greater the amount of assets. Meanwhile, the lower the ratio, the greater amount of current liabilities. A very low ratio represents the idea that the company’s debt and amounts owed to third parties is too high which shows that the business is too risky for investment. A very high ratio shows that the business does not invest or purchase enough on credit from third parties implying less chances of growth.

Quick Ratio-this is the quick assets over current liabilities. This ratio should be around 1:1. Quick assets are represented by total assets minus investment, otherwise known as inventory. This ratio essentially shows a businesses ability to pay off current liabilities. A low ratio shows that a company has trouble paying off these current debts of less than one year, therefore implying a risky investment. A high ratio implies efficient payment, but less actual initiative towards third parties. Therefore, the finest ratio should be equal (1:1)

More Ratios Debt to Asset Ratio-this ratio means what it says. It is the debt (total liabilities)

over assets. Simply, the higher the ratio, the greater the risk. Therefore, investment is suitable in general, if the debt to asset ratio is very low.

Average Collection Period-this ratio represents accounts receivable over average daily sales. In other words, what is owed to you over your sales per day. Firms will increase this number in order to get more sales. If this ratio is too low, no one will invest, but if its too high, the company will go out of business. Therefore, an investor should look at this business if their ratio is in the middle.

Average Days in Inventory-this ratio is simply inventory over average daily cost of goods sold. Average daily cost of goods sold is the daily expenses incurred for selling a product. This ratio measures everything in cost, showing how fast inventory is sold. If this ratio is too high, no one is interested. But, if it is too low, the business does not have enough inventory to supply to consumers.

Return on Sales, Assets, and Equity Return on Sales-this is otherwise known as the Profit Margin. It represents one

component which determines the return on assets. Return on sales is represented by income plus interest expense over sales. Obviously, the higher the profit margin, the higher the profitability for the firm. Although profitability is not the main component of investment analysis, it is common sense that you should invest in a firm with high profit margins.

Return on assets-this is return on sales times asset turnover which is sales over assets. Return on assets are subjective based on comparisons of past and future ratios. This means that a good return on assets is only good if it has improved. Thus you can determine an efficient return on assets if the ratio will go higher in the future.

Return on Equity-this is net income over stockholders’ equity. This is the owner’s return on an investment. Obviously, a higher return on equity is better for the owner and the investor. One can determine if they should invest if the business is making good use of borrowed funds. This can be determined if the return on equity is higher than the return on assets. This only occurs when one’s return on assets is greater than one’s cost of borrowing.

Ratios TableDivision Current

RatioQuick Ratio Debt to

Asset RatioAverage Collection Period

Average Days in Inventory

Division A 2.85 1.67 0.39 45.63 60.83

Division B 3.55 2.14 0.23 39.75 60.83

Division C 4.40 2.98 0.22 46.36 60.54

Firm Total 3.45 2.14 0.27 43.70 60.75

Return TableDivision Return on Sales Return on Assets Return on Equity

Division A 6.63% 14.75% 22.01%

Division B 9.46% 18.26% 22.35%

Division C 7.40% 13.30% 15.25%

Firm Total 10.34% 20.45% 26.47%

Analysis

Division Current Ratio

Quick Ratio Debt to Asset Ratio

Average Collection Period

Average Days in Inventory

Division A Very Good Good Decent Very Good Decent

Division B Decent Decent Very Good Excellent Decent

Division C Poor Poor Very Good Very Good Decent

Firm Total Decent Decent Very Good Very Good Decent

Division Return on Sales Return on Assets Return on Equity

Division A Good Good Excellent

Division B Good Very Good Excellent

Division C Good Good Very Good

Firm Total Good Excellent Excellent

Analysis

General Strengths And Weaknesses Strengths Weaknesses A High current ratio High Risk Good Collection Periods Lower Consumer Interest

B High Debt to Asset Little 3rd Party Investment Good Collection Periods Low Chance of Growth   C High Debt to Asset Little 3rd Party Investment Good Collection Periods Low Chance of Growth   F High Debt to Asset Little 3rd Party Investment Good Collection Periods Low Chance of Growth   All Firms have exceptional Returns on Sales, Assets, and Equity (see Chart)

Ratios

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Return on Sales Return onAssets

Return on Equity

Database A

Database B

Database C

Returns Table

GradingGrading Scale

Excellent 6

Very Good 5

Good 4 Division Results

Decent 3 Division A: 30

Poor 2 Division B: 36

Very Poor 1 Division C: 30

Firm: 35