Analyze the key ratios and comment on the trends that you believe provide the mo
ID: 2592405 • Letter: A
Question
Analyze the key ratios and comment on the trends that you believe provide the most useful information in deciding whether or not this would be a good company to invest in.
Ratio
Unit
2016
2015
Tests of Profitability:
Net Profit Margin
%
6.61
5.23
Gross Profit Percentage
%
20.75
21.85
Return on Equity
%
10.55
61.4
Earnings per Share
1
0.17
Tests of Liquidity:
Receivables Turnover
5.14
4.34
Days to Collect
71.04
84.02
Inventory Turnover
3.91
3.67
Days to Sell
93.35
99.38
Current Ratio
1.7
1.45
Tests of Solvency:
Debt-to-Assets
%
77.95
79.09
Ratio
Unit
2016
2015
Tests of Profitability:
Net Profit Margin
%
6.61
5.23
Gross Profit Percentage
%
20.75
21.85
Return on Equity
%
10.55
61.4
Earnings per Share
1
0.17
Tests of Liquidity:
Receivables Turnover
5.14
4.34
Days to Collect
71.04
84.02
Inventory Turnover
3.91
3.67
Days to Sell
93.35
99.38
Current Ratio
1.7
1.45
Tests of Solvency:
Debt-to-Assets
%
77.95
79.09
Explanation / Answer
Net profit Margin has been improved from previous year as compared to Gross profit ratio. This shows that company is better in 2016 than 2015.
Return on Equity has been drastically reduced to 10.55% as compared to 61.4%, which is not a good sign for the company. If it was a transposition error and the ratio is 105.5% then it will be positive for company to invest in.
EPS has increased from previous year significantly, which shows investing opportunities in company.
liquidity ratios have been improved in 2016 than in 2015, this is also a good sign to invest in the company.
Current ratio has been improved as well, indicating better performance of company to invest in.
Debt assets ratio is closer to 0, indicating company is performing better than previous year as debts have been lower in current year.
The ultimate aim of any investment is returns. Return on equity, or ROE, measures the return that shareholders get from the business and overall earnings. EPS shows short term earnings of the company. It depends on the investors duration of investment to decide which factor is crucial for investment in shares of company or not.