Enable contrast version

# Tutor profile: Anup S.

Inactive
Anup S.
CPA, CFA - Online tutoring experience to over 2000 students across US/Canada/UK/Australia
Tutor Satisfaction Guarantee

## Questions

### Subject:Corporate Finance

TutorMe
Question:

Assignment 3: Ratio Analysis By Tuesday, November 22, 2016 solve the problem below, calculate the ratios, interpret the results against the industry average, and fill in the table on the worksheet. Then, provide an analysis of how those results can be used by the business to improve its performance. Turn in your completed work to the M1: Assignment 3 Dropbox by Tuesday, November 22, 2016. Balance Sheet as of December 31, 2010 Gary and Company Cash \$45 Accounts payables \$45 Receivables 66 Notes payables 45 Inventory 159 Other current liabilities 21 Marketable securities 33 Total current liabilities \$111 Total current assets \$303 Net fixed assets 147 Long Term Liabilities Total Assets \$450 Long-term debt 24 Total Liabilities \$135 Owner’s Equity Common stock \$114 Retained earnings 201 Total stockholders’ equity 315 Total liabilities and equity \$450 Income Statement Year 2010 Net sales \$795 Cost of goods sold 660 Gross profit 135 Selling expenses 73.5 Depreciation 12 EBIT 49.5 Interest expense 4.5 EBT 45 Taxes (40%) 18 Net income 27 1. Calculate the following ratios AND interpret the result against the industry average: Ratio Your Answer Industry Average Your Interpretation (Good-Fair-Low-Poor) Profit margin on sales 3% Return on assets 9% Receivable turnover 16X Inventory turnover 10X Fixed asset turnover 2X Total asset turnover 3X Current ratio 2X Quick ratio 1.5X Times interest earned 7X 2. Analysis: Give your interpretation of what the ratios calculations show and how the business can use this information to improve its performance. Justify all answers. Assignment 3 Grading Criteria Maximum Points Has correctly calculated the ratios. 40 Has correctly analyzed and interpreted the significance of the resulting ratios and suggested actions for improvement. 40 Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation 20 Total: 100

Inactive
Anup S.

Ratio Analysis – Gary and Company The table below presents the ratios and their comparison against the industry average: Ratio Your Answer Industry Average Your Interpretation (Good-Fair-Low-Poor) Profit Margin on Sales 3.40% 3% Good Return on Assets 6.00% 9% Poor Receivable Turnover 12.05 times 16X Fair Inventory Turnover 4.15 times 10X Poor Fixed Asset Turnover 5.41 times 2X Good Total Asset Turnover 1.77 times 3X Poor Current Ratio 2.73 times 2X Fair Quick Ratio 1.30 times 1.5X Fair Times Interest Earned 11.00 times 7X Good (Please refer the attached excel for workings) Workings: 1. Profit Margin on Sales Net profit \$27.00 Net Sales \$795.00 Therefore, Profit Margin on Sales (Net profit / Sales) 3.40% 2. Return on Assets Net profit \$27.00 Total Assets \$450.00 Therefore, Return on Assets (Net profit / Total Assets) 6.00% 3. Receivable Turnover Net Sales Revenue \$795.00 Avg Accounts Receivable \$66.00 Therefore, Receivables Turnover 12.05 4. Inventory Turnover Cost of Goods Sold \$660.00 Avg. Inventory \$159.00 Therefore, Inventory Turnover 4.15 5. Fixed Asset Turnover Net Sales Revenue \$795.00 Net Fixed Assets \$147.00 Therefore, Fixed Assets Turnover 5.41 6. Total Asset Turnover Net Sales Revenue \$795.00 Total Assets \$450.00 Therefore, Total Assets Turnover 1.77 7. Current Ratio Total Current Assets \$303.00 Total Current Liabilities \$111.00 Therefore, Current Ratio 2.73 8. Quick Ratio Current Assets - Inventory \$144.00 Total Current Liabilities \$111.00 Therefore, Quick Ratio 1.30 9. Times Interest Earned EBIT \$49.50 Interest Expenses \$4.50 Therefore, Times Interest Earned 11.00 Interpretation: 1. The profit margin of the company is calculated as 3.40% which is more than the industry average of 3%, it indicates that the company has better profit margins against that majority of the competitors in the industry. The company should focus its marketing efforts to sell more of the goods at least at this margin to generate higher overall profits for the company. 2. The company’s return on Assets is at 6.00% which is lower than the industry average of 9.00%. This implies that the company is not using its assets effectively and they should target their efforts in reducing the asset cost, reducing the expenses and increasing their revenue. Though the company has higher profit margin than the average, the lower return on assets shows that it has scope to further improve the margins and ROA by targeting more sales and reducing expenses. 3. The receivables turnover of the company is at 12.05 times which indicates that the company is able to receive the credit sales from its debtors 12.05 times in a year. This is lower than the industry average of 16 times. The company should make more stringent policies for its debtors so that they pay off in time. The company can also consider reducing the credit to its customers at an optimal level so that the sales doesn’t decline and the credit sales are reduced. 4. The inventory turnover ratio of the company is calculated at 4.15 times against an industry average of 10 times. This is very poor as compared to the industry average and a gap of almost 6 times clearly shows that the company has not been able to utilize the inventory efficiently. The company should increase its sales and try and reduce the level of inventory it maintains to reduce the inventory turnover. The company’s inventory is held up in stores and not getting sold. The company should focus its marketing efforts to sell inventories at a higher pace. 5. The Fixed Asset turnover of the company is at 5.41 times which is much higher than the industry’s average of 2 times. This essentially proves that the company has been able to effectively use all of its fixed assets to generate revenues. This is a good sign! 6. The total assets turnover at 1.77 times is lower than the industry average of 3 times which proves that the company has not been able to effectively use the current assets of the company. I quote current assets as in point 5 above we have seen that the company has used its fixed assets effectively, so if the total assets turnover are lower, it implies that the current assets were not used effectively. This is further established by lower inventory turnover in point 4 above. The company should consider reducing its investment in inventory. 7. The current ratio of the company at 2.73 times is better than the industry average of 2 times. This implies that the company has enough current assets to pay off its liabilities in time and meet its current debt obligation. It is better equipped to meet the debt obligation than its competitors. 8. The quick ratio of the company at 1.30 times is lower than the industry average of 3 times. Inspite of having better current ratio the company is lagging in the quick ratio which is mainly due to the inventory holding of the company. The company can improve the ratio by reducing the investment of the inventory. 9. The times interest earned is at 11 times which is better than the industry average of 7 times. The company is generating enough revenue to pay off the interest on the debts. It is a welcoming news for the money lenders as the company will be able to pay off their interest in time. The company can consider expanding business as it will be able to raise fund easily from the market. In a nutshell, the company’s inventory is a major cause of problem and the company should direct its efforts to sell off its inventory faster, collect the receivables sooner and sell more of its products to generate higher revenues and improve other ratios.

TutorMe
Question:

Inactive
Anup S.

TutorMe
Question:

Inactive
Anup S.

## Contact tutor

Send a message explaining your
needs and Anup will reply soon.
Contact Anup

Start Lesson

## FAQs

What is a lesson?
A lesson is virtual lesson space on our platform where you and a tutor can communicate. You'll have the option to communicate using video/audio as well as text chat. You can also upload documents, edit papers in real time and use our cutting-edge virtual whiteboard.
How do I begin a lesson?
If the tutor is currently online, you can click the "Start Lesson" button above. If they are offline, you can always send them a message to schedule a lesson.
Who are TutorMe tutors?
Many of our tutors are current college students or recent graduates of top-tier universities like MIT, Harvard and USC. TutorMe has thousands of top-quality tutors available to work with you.
BEST IN CLASS SINCE 2015
TutorMe homepage