5:58 PM 78% shows the different categories of calculated ratios for Elvis Produc
ID: 2436216 • Letter: 5
Question
5:58 PM 78% shows the different categories of calculated ratios for Elvis Products International. 2. Define each ratio (except 11, 16, & 18) and write what each ratio indicates 3. Then compare each ratio (of the current period) with that of the previous period. Also, compare each ratio (of the current period) with that of the industry In other words, please tell whether each ratio of the current period is doing better or worse compared to the previous period and industry average. Then make overall comments with regard to liquidity, efficiency, coverage, and profitability of the company 4. Will you invest in this company? Why?Explanation / Answer
2. Liquidity ratios measure the ability of a firm in meeting its short-term obligations. Current ratio and quick ratio are the most important liquidity ratios for measuring the short-term financial position of a business enterprise.
The current ratio is defined as the ratio of current assets to current liabilities. Current assets include stock, cash, debtors etc. whereas current liabilities include creditors, bills payable etc. Current ratio is an indicator of a firm's short-term solvency and higher the current ratio, higher is the capacity of the firm to meet short-term obligations. A current ratio of 2:1 is considered satisfactory.
The quick ratio is defined as the ratio of quick assets (current assets less stock and prepaid expenses) and quick liabilities (current assets less bank overdraft). The quick ratio is considered superior to current ratio in testing the short-term solvency and higher ratio indicates a better short-term financial position of a firm. A quick ratio of 1:1 is considered ideal.
Efficiency ratios measure the ability of a company in the utilization of assets and liabilities of a firm.
Inventory turnover ratio can be defined as the ratio of cost of goods sold and average inventory. It indicates the speed at which the inventories are converted to sales and then to cash. A high ratio is an indication of a fast sale of inventory.
Accounts receivable turnover ratio is defined as the ratio of net credit sales to sundry debtors. It measures the speed with which debts are collected. A higher ratio indicates prompt payment of debtors.
Average collection period can be defined as the period that is needed to recover the debts from the debtors. A shorter collection period indicates prompt payment of debtors and longer period indicates inefficiency of credit collection.
Total asset turnover ratio can be defined as the ratio of sales to total assets. It indicates the sales generated in a firm in relation to the value of assets. The higher ratio indicates that the sales revenue is sufficient to cover up the total assets.
Leverage ratios measure the ability of a firm to pay the interest regularly and repay the principal.
Long-term debt ratio can be defined as the ratio of assets to loans and other financial obligations. It shows the percentage of a company's assets that are financed through loans and other financial obligations. The lower ratio indicates that the company is less dependent on financial obligations to meet business needs.
Debt to equity ratio can be defined as the ratio of total debts and owned capital. It indicates the relative proportion of debt and equity in financing the assets of a company. A higher ratio indicates that creditors have invested more in the business than shareholders.
Coverage ratio measures the ability of a firm in servicing the debts and meeting financial obligations.
Times interest earned can be defined as the ratio of interest charges to operating profit. It indicates whether the firm has earned a sufficient amount of profits to pay the periodic interest charges. A higher ratio indicates the sufficiency of profits to meet interest charges.
Cash coverage ratio can be defined as a ratio of cash available to interest charges. It indicates the amount of cash available to pay interest charges. A higher ratio indicates that the company has a sufficient amount of cash to pay interest charges.
Profitability ratios measure the ability of a firm to generate an adequate amount of profits.
Gross profit margin can be defined as the ratio of gross profit to net sales. It indicates the efficiency of trading operations in a business enterprise. A higher ratio indicates efficiency in production operations.
Operating profit margin can be defined as the ratio of operating profit to net sales. It indicates the amount of profit left after making variable payments like wages, salaries etc. A higher ratio indicates that the company is efficient in controlling the expenses.
Net profit margin can be defined as the ratio of net profit to net sales. It indicates the overall profitability of a business enterprise. A higher ratio indicates the efficiency of business in assuring reasonable returns to owners and high overall efficiency.
Return on total assets can be defined as the ratio of earnings before interest and tax to total assets. It indicates the effectiveness of a company to earn revenues before making contractual obligations. A higher ratio indicates the efficiency of business
Return on equity can be defined as the ratio of net profit after tax to equity shareholder's fund. It indicates the profitability of a company in providing returns to equity shareholders. A higher ratio indicates higher returns to equity shareholders.
Return on common equity can be defined as the net profits that can be made available to common stockholders. A higher ratio indicates higher returns to common stockholders.
3. Liquidity ratios
As far as the current ratio is concerned, Elvis Products International has improved in 2016 compared to 2015 although, in both the years the company is not able to meet the industry benchmark.
As far as the quick ratio is considered, the company was not able to meet short-term obligations in a fast manner in 2016 compared to 2015 due to a slight decrease in quick ratio. In both the years, the company could not meet the industry benchmark.
Efficiency Ratios
Inventory turnover ratio for the company in 2016 have decreased in a slight manner compared to 2015 and is not able to meet the industry benchmark
A/R turnover for the company have decreased and the average collection period has gone up in 2016 compared to 2015 and the company failed to meet the industry benchmark.
Fixed assets turnover went up in 2016 compared to 2015 whereas total assets turnover slightly went down in 2016. The company could not meet industry benchmark.
Leverage ratios
As far as total debt and long-term debt ratios are concerned, higher ratios in 2016 compared to 2015 showed that the company is using more loans to meet the business needs. The company could not meet the industry benchmark also.
It can also be observed that the company is having higher LTD to total capitalization, debt to equity and LTD to equity in 2016 compared to 2015 indicating more debt in the capital structure. Also, the industry benchmark is not met.
Coverage Ratios
As far as the coverage ratios are concerned, the company is not making sufficient profits and cash to meet the interest charges as the ratio decreased from 2015 to 2016 and the company could not meet the benchmark
Profitability Ratios
As far as gross profit, operating profit, and net profit ratios are concerned, the company is making lower profits in relation to sales in 2016 compared to 2015 and could not meet the industry benchmark.
Also, ROA, ROE, and ROCE have deteriorated in 2016 compared to 2015 indicating low profitability in 2016. Also, the company could not meet the industry benchmark.
4. It would not be advisable to invest in Elvis Products International as the company's profitability is deteriorating and cannot meet the industry benchmarks. Low profits would lead to inefficiency in production operations and the company would find it difficult to control the costs. Also, low profits would not assure appropriate returns to investors. The short-term financial position of the company is also not up to the mark and is finding difficulty in meeting the debts. Higher debt in the capital enhances the leverage and risk in the company which prevents investment in the company. The company is also finding it difficult to convert inventory to cash and the debt collection is not prompt in nature.
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