Question

Ratio analysis is important to all businesses regardless of product or service sold. Each industry has averages benchmarks in which to compare your companys’ individual performance. Please think about and answer the following questions. Remember, these questions are asking for you to be creative and answer the question, ‘HOW’, I am looking for real possibilities that you might try to accomplish in ‘your’ company.

1.Choose EITHER a service or product that you are producing and selling. Tell me about your product or service company.

2.Your Accounts Receivable Turnover Rate is 4.7; are you please with this? Why or why not? What if anything will you do in the future to attempt to adjust this?

3.The Return on Equity is 11%, the Return on Total Assets is 8%. What does this tell me about the company? Is this a good situation to be in? Why or why not?

4.Explain how a vertical analysis and a horizontal analysis differ. Give examples of when you would use each one.

Answer 1

1. I choose diamond as my product and diamond manufcaturing and distribution as my business. The name of the company shall be " Diaonj" for diamond online jewellery. The manufcaturing shall be done in house and the unique selling point would be customization of diamond jewellery.

2. Accounts receivable turnover is a measure of how many times a company collects its receivables. A ratio of 4.7 is relatively low for me as I require intensive capital to purchase raw diamonds. I would tighten the credit terms and focus more on the collecting the receivables at hand.

3. Return on equity and return in assets denote how efficiently the shareholders money and the assets of the business have been utilized. The ROE of 11% and ROA of 8% are acceptable , however they are not ideal. The return on assets can be more than 8% as this means that the net income is only 8% of the total investment.

4. In a vertical analysis, various items of the balance sheet and profit and loss account are represented as a % of the assets , liabilities or sales. I would use vertical analysis if I need to know the proportions of items as compared to a base .

In a horizontal analysis, ratios are calculated for a number of periods. I would use this to assess profitability over a number of periods.