Finance
COMPANY G
MEMORANDUM
TO: CEO
FROM: Student Name
CC: CFO
DATE: November 29, 2011
SUB: RATIO ANALYSIS
Current Ratio The current ratio of the company is at a lower side i.e. 1.79, which may lead to some liquidity issues for the company in the future. The ratio was 1.86 in year 11 and has come down to 1.74 in years 12. The industry average was 2.1 and higher quartile was 3.1. Thus, this indicates a weakness for the company as liquidity may be compromised.
Acid Test Ratio
The acid test ratio is 0.43 in year 12 which was 0.64 in year 11. This indicates a very high proportion of stock in trade in total value of total assets. The average of industry was 0.9 and higher quartile was 1.6. This indicates the liquidity position of the company is not good and the current liabilities may not be met as stock in trade is considered to be a slow moving asset. Therefore, it is a weakness for the company.
Inventory Turnover
The inventory turnover ratio of the company was 6.1 in year 11 which came down to 5.2 in years 12. If compared to the industry quartile, it gives a weak show as the industry has a robust ratio of 8.3 to an upper limit of 13, thus indicating lesser operating efficiency in company G.
Accounts Receivable Turnover
The ratio is 30.5 in the year 12 which has come down 32.2 in the year 11. The industry lower quartile is higher than company G, thus it is a concern for the company.
Days’ Sales in Receivable
The days’ sale in receivable is a calculation that is a different version of accounts receivable turnover. Here, number of days in a year is divided by the turnover ratio to achieve the number of days of sales that is represented by receivables. The ratio was 12 in the year 12 which was 11.1 in the year 11. This indicates no concern as it is close to the industry’s average of 13.5
Debt Ratio
The debt ratio was 28.34% in year 11 which went up marginally to 29.54% in the year 12. This shows that most of its assets are financed through equity and
MEMORANDUM
TO: CEO
FROM: Student Name
CC: CFO
DATE: November 29, 2011
SUB: RATIO ANALYSIS
Current Ratio The current ratio of the company is at a lower side i.e. 1.79, which may lead to some liquidity issues for the company in the future. The ratio was 1.86 in year 11 and has come down to 1.74 in years 12. The industry average was 2.1 and higher quartile was 3.1. Thus, this indicates a weakness for the company as liquidity may be compromised.
Acid Test Ratio
The acid test ratio is 0.43 in year 12 which was 0.64 in year 11. This indicates a very high proportion of stock in trade in total value of total assets. The average of industry was 0.9 and higher quartile was 1.6. This indicates the liquidity position of the company is not good and the current liabilities may not be met as stock in trade is considered to be a slow moving asset. Therefore, it is a weakness for the company.
Inventory Turnover
The inventory turnover ratio of the company was 6.1 in year 11 which came down to 5.2 in years 12. If compared to the industry quartile, it gives a weak show as the industry has a robust ratio of 8.3 to an upper limit of 13, thus indicating lesser operating efficiency in company G.
Accounts Receivable Turnover
The ratio is 30.5 in the year 12 which has come down 32.2 in the year 11. The industry lower quartile is higher than company G, thus it is a concern for the company.
Days’ Sales in Receivable
The days’ sale in receivable is a calculation that is a different version of accounts receivable turnover. Here, number of days in a year is divided by the turnover ratio to achieve the number of days of sales that is represented by receivables. The ratio was 12 in the year 12 which was 11.1 in the year 11. This indicates no concern as it is close to the industry’s average of 13.5
Debt Ratio
The debt ratio was 28.34% in year 11 which went up marginally to 29.54% in the year 12. This shows that most of its assets are financed through equity and
References: http://www.investopedia.com/terms/r/ratioanalysis.asp http://www.investopedia.com/university/ratios/ http://www.cliffsnotes.com/study_guide/Ratio-Analysis.topicArticleId-21248,articleId-21213.html