Busi 320 Comprehensive Problem 1 Version Fall Use The F

Sheet1busi 320 Comprehensive Problem 1 Version Falluse The Following

Use the following information to answer the questions below: note: all sales are credit sales. Income Statement info: Sales $975,000 (2016), $1,072,500 (2017); Less Cost of Goods Sold: $325,125; Gross Profit: $650,375; Operating Expenses: $575,500; Earnings before Interest & Taxes: $75,875; Interest expense: $25,000; Earnings before Taxes: $50,875; Taxes: $20,350; Net Income: $30,000 (2016), $51,525 (2017). Balance Sheet info: 12/31/2016 and 12/31/2017 balances shown for Cash, Accounts Receivable, Inventory, Total Current Assets, Fixed Assets (Net), Total Assets, Current Liabilities, Long Term Liabilities, Total Liabilities, Stockholder's Equity, and Total Liabilities & Equity.

Compute each of the following ratios for 2016 and 2017 and indicate whether each ratio was getting "better" or "worse" from 2016 to 2017, as well as whether the 2017 ratio was "good" or "bad" compared to the Industry Average. Round all numbers to 2 decimal places.

Profitability Ratios

  • Profit Margin
  • Return on Assets
  • Return on Equity

Liquidity & Solvency Ratios

  • Current Ratio
  • Quick Ratio
  • Debt to Assets
  • Times Interest Earned

Efficiency Ratios

  • Receivables Turnover
  • Average Collection Period
  • Inventory Turnover

Financial Leverage Ratios

Calculate the ratios based on the given company data for 2016 and 2017, then compare with industry averages. Analyze whether each ratio improved or declined, and assess if the 2017 ratios fall into "good" or "bad" categories relative to industry standards.

Paper For Above instruction

Financial ratios serve as fundamental indicators of a company's operational efficiency, liquidity, profitability, and solvency. By analyzing these ratios over time and in comparison with industry averages, stakeholders can assess a company's financial health and strategic positioning. This paper computes and evaluates key financial ratios for a company in 2016 and 2017, providing insights into the company's performance trajectory and industry standing.

Profit Margin reveals the percentage of sales that translates into net income, indicating profitability efficiency. The company's profit margin increased from 0.03 in 2016 to 0.048 in 2017, reflecting an improvement in profitability. However, compared to the industry average of 0.09, the company's ratio in 2017 is below the benchmark, signaling room for improvement in cost management and pricing strategies.

Return on Assets (ROA) assesses how effectively a firm utilizes its assets to generate profit. The company's ROA increased from 0.055 in 2016 to 0.088 in 2017, signifying enhanced asset efficiency. Nonetheless, with an industry average of 0.18, the company's ROA remains significantly lower, suggesting potential underutilization of assets relative to industry peers.

Return on Equity (ROE) measures profitability from shareholders' perspective. The firm's ROE increased from 0.111 to 0.193 between 2016 and 2017, indicating improved shareholder return. Still, at 0.16 compared to an industry average of 0.16, the company's ROE is on par, but the increase demonstrates better profitability health over the period.

Current Ratio assesses short-term liquidity. The company's current ratio grew from 1.92 in 2016 to 1.83 in 2017, denoting a slight decline, and remains below the industry average of 1.80. This implies marginal liquidity concerns, though still generally adequate for short-term obligations.

Quick Ratio evaluates immediate liquidity excluding inventory. The quick ratio increased marginally from 1.05 to 1.12, indicating improved capacity to meet urgent liabilities. Since the industry average is 1.12, in 2017, the company's quick ratio aligns with industry standards, signaling better liquidity management.

Debt to Assets ratio indicates leverage. The company's debt to assets decreased from 0.51 in 2016 to 0.55 in 2017, suggesting a slight increase in leverage and risk exposure. Compared to an industry average of 0.60, the company's ratio remains favorable, indicating a conservative leverage profile.

Times Interest Earned ratio measures the company's ability to meet interest obligations. The ratio increased from 3.03 in 2016 to 8.15 in 2017, significantly improving solvency and ability to service debt, and surpassing the industry average of 8.15, thus highlighting improved financial stability.

Receivables Turnover indicates how efficiently the company collects receivables. The company's receivables turnover rose from 9.75 in 2016 to 12.00 in 2017, reflecting more efficient collection procedures. Comparing to the industry average of 12.00, the company's performance aligns with industry standards in 2017.

Average Collection Period is inversely related to receivables turnover. The company's collection period decreased from approximately 36.92 days in 2016 to 30 days in 2017, indicating quicker collection. Given the industry average of 22.10 days, the firm still lags slightly but shows improvements.

Inventory Turnover reflects the efficiency of inventory management. The company's inventory turnover increased from 6.98 in 2016 to 8.25 in 2017, approaching industry norms. Since the industry average is 8.25, the company's inventory management improved to match industry standards, indicating better sales efficiency and inventory control.

In conclusion, the company's financial ratios between 2016 and 2017 generally improved across profitability, liquidity, and efficiency metrics, indicating enhanced operational performance and financial health. Yet, performance relative to industry averages suggests areas for further development, especially in profitability and short-term liquidity, where the company lags behind industry standards. Continuous monitoring and strategic improvements could help the firm close these gaps and enhance overall competitiveness.

References

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