Financial Ratio and Industry Average

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a. Why are ratios useful? What three groups use ratio analysis and for what reasons?

Financial ratios are designed to extract important information that might not be obvious simply from examining a firm’s financial statements. Financial statement analysis involves comparing a firm’s performance with that of other firms in the same industry and evaluating trend in the firm’s financial position over time. From the textbook , we know managers use financial analysis to identify situations needing attention; potential lenders use financial analysis to determine whether a company is creditworthy; and stockholders use financial analysis to help predict future earnings, dividends, and free cash flow.

b. Calculate the 2011 current and quick ratios.

Current ratio = Current assets / Current liabilities
= 2,680,112 / 1,039,800 = 2.6
Quick ratio = (Current assets - Inventories) / Current liabilities = (2,680,112 – 1,716,480) / 1,039,800 = 0.9

Ratio Analysis
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2009 2010 2011E Industry Average Current 2.3 1.5 2.6 2.7 Quick 0.8 0.5 0.9 1.0

Compared the current and quick ratios from 2009 to 2011 with the industry average, it can be easily indicated Computron has a weak liquidity position, especially in 2010. In 2011 it was improved and very close to industry average.

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 stock-holders for stock valuation. These different types of analysts would not have an equal interest in the liquidity ratios. Consider the current ratio from the perspective of a shareholder. A high current ratio could mean that the company has a lot of money tied up in nonproductive assets which might well become obsolete before they can be sold. But the bankers want to see a high current ratio so they can decide whether to extend credit to the company.

c. Calculate the 2011 inventory turnover, days sales outstanding (DSO), fixed assets turnover and total assets turnover.

Inventory turnover ratio = Sales / Inventories = 7,035,600 / 1,716,480 = 4.1

Ratio Analysis
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2009 2010 2011E Industry Average Inventory turnover 4.8 4.5 4.1 6.1

DSO = Days Sales Outstanding = Receivables / (Annual sales / 365) = 878,000 / (7,035,600/365) = 45.5 days

Ratio Analysis
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2009 2010 2011E Industry Average DSO 37.3 39.6 45.5 32.0

Fixed assets turnover = Sales / Net fixed assets = 7,035,600 / 3,836,840 = 8.4

Ratio Analysis
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2009 2010 2011E Industry Average Fixed assets turnover 10.0 6.2 8.4 7.0

Total assets turnover = Sales / Total assets = 7,035,600 / 3,516,952 = 2.0

Ratio Analysis
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2009 2010 2011E...
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