1. Why are ratios useful? What are the five major categories of ratios? * Ratios are used by managers to help improve firm’s performance, by lenders to help evaluate the firm’s likelihood of repaying debt and by stakeholders to help forecast future earnings and dividends. There are five major categories of ratio profitability, asset management, debt management, liquidity and market value.
2. Calculate Everelite’s 2009 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity positions in 2007, in 2008, and as projected for 2009? We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysis have an equal interest in the company’s liquidity ratios?
Current Ratio (2009) = Current Asset/Current Liabilities
= $1985827/ $1073192
Quick Ratio (2009) = (Current Asset - Inventory)/ Current Liabilities
= ($1985827 - $909379)/ $1073192
* The company’s current and quick ratios are low relative to its 2007 (CR=2.02x, QR=1.14x) and the ratios are went slightly downward in 2008 (CR=1.95x, QR=0.87x). Comparing both years; 2007 and 2008, we can see in 2009 the ratios were increased by a small different. * No, they don't have an equal interest in the liquidity ratio. The following are the specific reasons: * MANAGER: Some of the most basic financial ratios show how much a business or investment will return compared to how much it will cost. When managers are planning new projects, these financial ratios provide the support they need to receive funding from executives to move forward. Executives like to see a high return on investment, or ROI, based on analysis of costs and projected revenues. After projects are completed, the same type of analysis can show the returns actually delivered, and how the investment lived up to expectations, which is useful for future strategy. * CREDIT ANALYST: Credit analysts will be particularly interested in the applicant's liquidity and ability to pay bills on time. Such ratios as the quick ratio, receivables, inventory turnovers, the average payable period and debt-to-equity ratio are particularly relevant. In addition to analyzing financial statements, the credit analyst will consider the character of the company and its management, the financial strength of the firm, and various other matters. * STOCKHOLDERS: Interested only in Return on Equity (ROE), Dividend Rate, Gross Margin, Net Income Margin and Quarterly and Annual Growth Ratios. In general, Financial Statement Analysis is used by: a) managers to evaluate and improve performance, b) lenders (banks and bondholders) and bond rating analysts (SP and Moody's) to evaluate the creditworthiness of a company, and c) stockholders (current or prospective) and stock analysts, to forecast earnings, DIV and stock price." The five types of ratios are liquidity, asset management, debt management, profitability, and market value ratios.
3. Calculate the 2009 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does Everelite’s utilization of assets stack up against other firms in the industry?
Inventory Turnover = COGS/Average Inventory
Days Sales Outstanding = Account Receivable/( Sales/365 days)
= 154.69 days
Fixed Asset Turnover = Sales/Net Fixed Asset
Total Assets Turnover = Sales/Total Asset
* The company inventory turnover has been steadily declining while its days sales outstanding has been changing over the years. While the company fixed assets turnover also has...