Problem
Interpreting Financial Statement Analysis
|
Ratio
|
Year 1
|
Year 2
|
|
Current ratio
|
3.12:1
|
2.96:1
|
|
Quick ratio
|
1.34:1
|
1.02:1
|
|
Receivables turnover
|
9.7 times
|
10.2 times
|
|
Inventory turnover
|
2.4 times
|
2.3 times
|
|
Profit margin
|
11.4%
|
12.6%
|
|
Asset turnover
|
1.21 times
|
1.22 times
|
|
Return on assets
|
13.7%
|
15.4%
|
|
Return on equity
|
28.5%
|
29.3%
|
|
Price-earnings ratio
|
10.4 times
|
12.4 times
|
|
Debt ratio
|
50.2%
|
45.3%
|
|
Times interest earned
|
9.6 times
|
13.0 times
|
What does the calculation of a financial statement ratio represent? How does one year compare to another? Is there a trend to the ratio data? Is the trend positive or negative? What can be done to change the trend? These are some of the questions that can be answered when the ratio data is interpreted. For this part of the assessment, demonstrate your ability to interpret the results of a multi-year financial ratio analysis.
On the Assessment 5, Part 2 Template you will find selected ratios for a company over a two-year period. Compare the ratios, and in a separate document (Word or Excel), submit your answers to the following questions:
1. What does the calculation of each ratio represent?
2. How does year one compare with year two, and what trend can be seen when you compare the two years?
3. Is the trend from year one to year two positive or negative?
4. What are the possible reasons for the trend?
5. What recommendations do you have for turning a negative trend to a positive trend?