Question

Eleanor’s Computers is a retailer of computer products. Using the financial data provided, financial ratio calculations for 2016. Advise management of any ratios that indicate potential problems and provide an explanation of possible causes of the problems.

2016

Current ratio 725,000/ 475,000 = 1.53X vs Industry Average 1.70X

Quick ratio 400,000/475,000 = 0.84X vs Industry Average 0.95X

Average collection period 275,000 – 1,500,000/ 365 days = 67 Days vs Industry Average 65 Day

Inventory turnover 1,200,000/325,000 = 3.69X vs Industry Average 4.50X

Fixed asset turnover 1,500,000/420,000 = 3.57X vs Industry Average 3.00X

Total asset turnover 1,500,000/1,145,000 = 1.31X vs Industry Average 1.37X

Debt ratio 875,000/ 1,145,000 x 100% = 76.4% vs Industry Average 60%

Times interest earned 200,000/ 72,000 = 2.78X vs Industry Average 4.75X

Gross profit margin 300,000/1,500,000 = 20% vs Industry Average 22.50%

Operating profit margin 200,000/1,500,000 = 13.3% vs Industry Average 12.50%

Net profit margin 76,800/1,500,000 = 5.1% vs Industry Average 6.50%

Return on total assets 76,800/1,145,000 = 6.7% vs Industry Average 8.91%

Return on equity 76,800/ 270,000 = 28.4% vs Industry Average 22.28%

Answer 1

Current Ratio & Quick Ratio are far below the Industry average. Current Ratio shows the firms ability to meet its short term liabalities.

Low Inventory turnover refers to low sales which affect the Gross profit margin & Net profit margin . Sales of the firm is low as compared to Industry Average

Times interest earned ratio measures the ability of an organization to pay its debt. here this ratio is low as per industry average and hence makes vulnarble

Other ratios are higher than then Industry average