Reference no: EM132241663
CASE:
Business Decisions using Financial Ratios
Jose Sanchez owns and operates Western Gear, a small merchandiser in outdoor recreational equipment. You are hired to review the three most recent years of operations for Western Gear.
Your financial statement analysis reveals the following results:
| |
2006 |
2005 |
2004 |
|
Sales index-number trend ...................
|
137.0
|
125.0
|
100.0
|
|
Selling expenses to net sales ..............
|
9.8%
|
13.7%
|
15.3%
|
|
Sales to plant assets .........................
|
3.5 to 1
|
3.3 to 1
|
3.0 to 1
|
|
Current ratio .....................................
|
2.6 to 1
|
2.4 to 1
|
2.1 to 1
|
|
Acid-test ratio ..................................
|
0.8 to 1
|
1.1 to 1
|
1.2 to 1
|
|
Merchandise inventory turnover ..........
|
7.5 times
|
8.7 times
|
9.9 times
|
|
Accounts receivable turnover ..............
|
6.7 times
|
7.4 times
|
8.2 times
|
|
Total asset turnover ..........................
|
2.6 times
|
2.6 times
|
3.0 times
|
|
Return on total assets........................
|
8.8%
|
9.4%
|
10.1%
|
|
Return on owner's equity ....................
|
9.75%
|
11.50%
|
12.25%
|
|
Net profit margin ..............................
|
3.3%
|
3.5%
|
3.7%
|
Plant assets are increasing Required:
Use these data to answer each of the following questions with explanations:
a. Is it becoming easier for the company to meet its current debts on time and to take advantage of cash discounts?
b. Is the company collecting its accounts receivable more rapidly over time?
c. Is the company's investment in accounts receivable decreasing?
d. Are dollars invested in inventory increasing?
e. Is the company's investment in plant assets increasing?
f. Is the owner's investment becoming more profitable?
g. Is the company using its assets efficiently?
h. Did the dollar amount of selling expenses decrease during the three-year period?
Note: Need G and H only. Particularly focus on H