Question

4. How can an increase in a company’s days sales uncollected affect the current ratio?

5. Why is the debt to assets ratio so important?

6. Suppose that a company’s current ratio was 2.5 last year and decreased to 2.0 this year. Last year’s quick ratio was 1.0 and stayed constant this year. What does this trend suggest?

Answer 1

4. Days' sales uncollected is a liquidity ratio that is used to estimate the number of days before receivables will be collected. It is used to determine the short term liquidity of the company. An increase in days sales uncollected would possibly lead to a decline in the current ratio as the debtors expected to be collected in the short run might get converted to long term debtors.

5. The debt to asset ratio is very important in determining the financial risk of a company. A ratio greater than 1 indicates that a significant portion of assets is funded with debt and that the company has a higher default risk. Therefore, the lower the ratio, the safer the company.

6. As the quick ratio was constant, it can be said that the inventory level of the company has gone down as compared to the previoius year. It can be due to a decrease in production level.