Transcript Ratio Analysis: Division A, B, and C

Ratio Analysis:
Division A, B, and C
Alissa Levesque
Colleen O’Boyle
Comparison Key
• Gold medal – first place
• Silver medal – second place
• Bronze medal – third place
Don’t sweat Prof. Pelesh . . . you’ll see . . .
Analysis of Current Ratio
•
Current Ratio = Current Assets
Current Liabilities
 Division B – 3.3
 Division C – 3.2
 Division A – 2.4
 All current ratios indicate healthy divisions
 Rule of thumb – 2:1 ratio is healthy
 All above 2
 Also known as a liquidity ratio
Days Sales Outstanding
• Days Sales Outstanding = Accounts Receivable
(Credit Sales/365)
• Division B – 31.5 days
• Division C – 36.5 days
• Division A – 42.6 days
• Indicates the number of days of sales that are tied up in accounts
receivable as of the end of the accounting period.
• Therefore, the lower the number, the healthier the division.
• Obviously, Division A is having the most difficulty receiving payments
on time.
Inventory Turnovers
 Inventory Turnover =
Cost of Sales ..
Average Inventory
 Division B – 5.7
 Division C – 5.7
 Division A – 5.6
 Shows how many times inventory was totally replaced during the year.
 All divisions are relatively normal in inventory turnover.
 Divisions B and C tied for first place, having the best turnover.
Debt to Equity
• Debt to Equity =
Debt capital
.
Debt capital + Equity Capital
 Division B – 9.14%
 Division C – 15.35%
 Division A – 22.54%
 Ratio of debt capital to total permanent capital.
 Measure of an entity’s financial risk.
 All division are under 50% and thus are normal, but the lower the
percent, the healthier the division.
Ratio Chart
Div. A
Div. B
Div. C
Current Ratio
2.4
3.3
3.2
Days Sales Outstanding
42.6
31.5
36.5
Inventory Turnover
5.6
5.7
5.7
Debt to Equity
22.54
9.14
15.35
**Debt to Equity ratios are percentages.
Ratio Graph
Ratio Comparisons
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Div. A
Div. B
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Div. C
Conclusions
• Because Division B has the healthiest ratios in each
category, it seems to be the healthiest division.
• Even though Divisions A and C lag behind Division B, the
company as a whole still appears healthy overall because
all of the ratios have relatively normal numbers.
• Advice to the company would be to concentrate on
improving Division A because its ratios indicate that it is
the weakest division.