You are the owner of a business and you hire a new accountant to help you manage the business. The new accountant tells you that in order to operate the business properly you have to pay attention to financial ratios. The accountant prepares your financial statements, then produces for you a number of ratios. The ratios that the accountant produced are listed below.
Question: For each one, what does the ratio tell you about your business. (Not an explanation of what the ratio is, but what it means to the operations of the business).
Current ratio - .85
Inventory to Sales Conversion Period – 180 days
Sales to Cash Conversion Period – 40 days
Purchases to Payments Conversion Period - 7 days
In addition to these ratios, the accountant also shares that the company has a gross profit margin of 15% and a net profit margin of 3%. Based on this additional information and the above ratio information, will this company have a good return on equity or a poor return on equity. (No calculations required. Just think in terms of what the company's balance sheet will look like with these ratios).