Question

Ratio	Industry Average
Return on total assets	1.00
Book value per common share	10.00
Days' sales in inventory	300.00
Return on shareholders' equity	20.00
Times interest earned ratio	1.00

Questions:

a. Explain why it would be favourable and unfavourable if an actual company had ratio values that were higher or also lower than the listed Ratio Industry averages.

b. Categorize each Ratio as either a: Liquidity ratio, Coverage ratio, Activity ratio, or Profitability ratio.

Answer 1

a)

	Industry Average	Favourable/ Unfavourable
Return on total assets	1	Higher the better, as same amount investment will yield higher return
Book value per common share	10	Higher the better, since the value of per share is higher
Days' sales in inventory	300	Lower than industry will mean company is blocking lower money in cash cycle which is beneficial
Return on shareholders' equity	20	Higher the better, as same amount of equity investment will yield higher return
Times interest earned ratio	1	Higher the better, as higher safety of company able to repay its obligation

b.

Return on total assets	Profitability ratio
Book value per common share	Profitability ratio
Days' sales in inventory	Activity ratio
Return on shareholders' equity	Profitability ratio
Times interest earned ratio	Coverage ratio