Question

What insights do these ratios provide about R&E’s financial performance? What problems, if any, does the company appear to have? Profitability ratios:	2008	2009	2010	2011
Return on equity (%)	17.1%	17.3%	15.7%	11.7%
Return on assets (%) -	11.3%	10.3%	7.7%	5.0%
Return on invested capital (%) -	18.7%	18.9%	17.4%	12.9%
Profit margin (%) -	3.3%	2.9%	2.4%	1.4%
Gross margin (%) -	16.0%	15.0%	15.0%	14.0%
Turnover-control ratios:
Asset turnover (X) -	3.4	3.6	3.2	3.5
Inventory turnover (X) -	8.4	8.5	7.1	7.8
Collection period (days) -	43.8	47.4	47.5	51.1
Days' sales in cash (days) -	21.9	14.6	14.6	7.3
Payables period (days) -	39.1	45.0	64.7	66.1
Leverage and liquidity ratios:
Assets to equity (X) -	1.5	1.7	2.0	2.4
Debt to assets (%) -	63.6%	63.9%	68.2%	70.5%
Debt to equity (%) -	96.7%	106.9%	139.0%	166.3%
Times interest earned (X) -	7.7	8.0	7.3	6.9
Times burden covered (X) -	4.0	4.3	4.0	3.4
Current ratio (X) -	2.8	2.4	1.8	1.7
Acid test (X) -	1.8	1.5	1.1	1.0

Answer 1

There is a clear decline in return on equity (ROE) in the last few years.

ROA has declined drastically, partially due to a sharp reduction in net profit margins. The gross margin have declined marginally but the net margins have reduced by half, which means that the company has issues with higher fixed costs like salaries, marketing, interest, etc.

Asset turnover ratios are stable but firm is receiving cash from its customers (days sales in cash) quickly and paying its suppliers (payables period) late.

The company has increased its leverage, which can be observed from increase in debt to equity ratio. The liquidity ratios have deteriorated as current ratio and acid test have declined sharply.