What do liquidity ratios and activity ratios measure

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Reference no: EM13899477

1. Explain how the credit analyst's focus will differ from the investment analyst's focus.

2. What are the limitations of financial ratios?

3. What do liquidity ratios measure? Activity ratios? Leverage ratios? Profitability ratios? Market ratios?

4. How is the Du Pont System helpful to the analyst?

5. Eleanor's Computers is a retailer of computer products. Using the financial data pro- vided, complete the financial ratio calculations for 2013. Advise management of any ratios that indicate potential problems and provide an explanation of possible causes of the problems.

 

Industry Averages

Financial Ratios

2011

2012

2013

2013

Current ratio

1.71X

1.65X

 

1.70X

Quick ratio

0.92X

0.89X

 

0.95X

Average collection period

60 days

60 days

 

65 days

Inventory turnover

4.20X

3.90X

 

4.50X

Fixed asset turnover

3.20X

3.33X

 

3.00X

Total asset turnover

1.40X

1.35X

 

1.37X

Debt ratio

59.20%

61.00%

 

60.00%

Times interest earned

4.20X

3.70X

 

4.75X

Gross profit margin

25.00%

23.00%

 

22.50%

Operating profit margin

12.50%

12.70%

 

12.50%

Net profit margin

6.10%

6.00%

 

6.50%

Return on total assets

8.54%

8.10%

 

8.91%

Return on equity

20.93%

20.74%

 

22.28%

Income Statement for Year Ended 12/31/13               Balance Sheet at 12/31/13

Sales

$1,500,000

Cash

$125,000

Cost of goods sold

1,200,000

Accounts receivable

275,000

Gross profit

$ 300,000

Inventory

325,000

Operating expenses

100,000

Current assets

$ 725,000

Operating profit

$ 200,000

Fixed assets (net)

$ 420,000

Interest expense

72,000

Total Assets

$1,145,000

Earnings before tax

128,000

Accounts payable

$ 150,000

Income tax (40%)

51,200

Notes payable

225,000

Net Income

$76,800

Accrued liabilities

100,000

 

 

Current liabilities

475,000

 

 

Long-term debt

400,000

 

 

Total liabilities

$ 875,000

 

 

Equity

270,000

 

 

Total liabilities and equity

$1,145,000

Reference no: EM13899477

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