1. Why are ratios useful? What are the five major categories of ratios? * Ratios are used by managers to help improve firm’s performance, by lenders to help evaluate the firm’s likelihood of repaying debt and by stakeholders to help forecast future earnings and dividends. There are five major categories of ratio profitability, asset management, debt management, liquidity and market value.
2. Calculate Everelite’s 2009 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity positions in 2007, in 2008, and as projected for 2009? We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysis have an equal interest in the company’s liquidity ratios?
Current Ratio (2009) = Current Asset/Current Liabilities = $1985827/ $1073192 = 1.85x
Quick Ratio (2009) = (Current Asset - Inventory)/ Current Liabilities = ($1985827 - $909379)/ $1073192 = 1.00x * The company’s current and quick ratios are low relative to its 2007 (CR=2.02x, QR=1.14x) and the ratios are went slightly downward in 2008 (CR=1.95x, QR=0.87x). Comparing both years; 2007 and 2008, we can see in 2009 the ratios were increased by a small different. * No, they don't have an equal interest in the liquidity ratio. The following are the specific reasons: * MANAGER: Some of the most basic financial ratios show how much a business or investment will return compared to how much it will cost. When managers are planning new projects, these financial ratios provide the support they need to receive funding from executives to move forward. Executives like to see a high return on investment, or ROI, based on analysis of costs and projected revenues. After projects are completed, the same type of analysis can show the returns