a) Ratio analysis does several things,. The first thing is it allows the company to compare itself with other like companies. If management feels things aren't going well, they can help pinpoint the problem through comparing their ratios with other companies. They may have several ratios that are comparable, but a couple which are way off. That might be where the problem is. It helps to evaluate financial statement.
It helps to take proper steps toward financial problem. Like reduce Debt.
Also, ratio analysis may help by comparing your company with prior periods. If a particular ratio is declining when it would be better if it were staying the same or increasing, then again looking at the ratios are important to find out where the problem lies.
Ratios are important to spot trends easily.
Five major categories of ratio:
1. Liquidity Ratio
2. Asset Management Ratio
3. Debt Management Ratio
4. Profitability Ratio
5. Stock Market Ratio
b) For the year 2003 the current ratio analysis for D’Leon’s shown below: Estimated Total Current Asset = 2,680,112
Estimated Total Current Liabilities = 1,144,800
We know that Current Ratio = Current Asset / Current Liabilities = 2,680,112 / 1,144,800 = 2.34
For year 2002 the current ratio = 1,926,802 / 1,650,568 = 1.2 For year 2001 the current ratio = 1,124,000 / 481,600 = 2.3
Company’s Liquidity Position:
• In the year 2003, D’Leon’s current asset were estimated 2.34 times of there current liabilities. • But it is unfavorable because it is slightly below the industry average. Industry average is 2.7 times. • The company’s current liability significantly rises from 2001 to 2002. After that rise it started to decline at year 2003. This is definitely a good sign for this company as it is recovering from its bad financial position. • The company’s current asset is continuously rising from year 2001 to 2003. This is also a good sign for this company.
For the year 2003 the Quick Ratio, or Acid Test Ratio analysis for D’Leon’s shown below: Quick Ratio, or Acid Test Ratio = (Current Asset – inventory) / Current Liability = (2,680,112 – 1,716,480) / 1,144,480 =0.84
For the year 2002 the Quick Ratio, or Acid Test Ratio analysis for D’Leon’s shown below: Quick Ratio, or Acid Test Ratio = (Current Asset – inventory) / Current Liability = (1926802 – 1287360) / 1650568 =0.39
For the year 2001 the Quick Ratio, or Acid Test Ratio analysis for D’Leon’s shown below: Quick Ratio, or Acid Test Ratio = (Current Asset – inventory) / Current Liability = (1124000 – 715200) / 481600 =0.85
a. From 2001 to 2002 the company’s Quick ratio has gone down because the inventory has relatively increased than the Current Assets. From 2002 to 2003 the company’s Quick ratio has gone up because the inventory has relatively decreased than the Current Assets.
To managers not all ratios are useful, because the importance of current ratio is more than the EPS. Current ratio gives the current status about how much company’s current assets are multiple of its current liabilities but EPS might not be a subject to bother to a manager if he is not a shareholder. To creditors not all ratios are useful, because the importance of Debt ratio is far more than the Total asset turnover ratio. Because if a company capital structure how much rely on debt is more important. To shareholder not all ratios are useful, because the importance of current ratio is less than the EPS. Because EPS is a factor of increase of share price not the...
Please join StudyMode to read the full document