4-2 Why would the inventory turnover ratio be more important for someone analyzi

Question

4-2 Why would the inventory turnover ratio be more important for someone analyzing a gro- cery store chain than an insurance company?

4-3 Over the past year, M. D. Ryngaert & Co. had an increase in its current ratio and a decline in its total assets turnover ratio. However, the company’s sales, cash and equivalents, DSO, and fixed assets turnover ratio remained constant. What balance sheet accounts must have changed to produce the indicated changes?

4-6 If a firm’s ROE is low and management wants to improve it, explain how using more debt might help.

Explanation / Answer

4-2

Inventory turnover ratio would be more important for someone analyszing grocery store chain than an insurance company because a grocery store chain would have large inventory representing a significant amount of current asset on the balance sheet. The analyst would be interested in finding out how quickly the store chain can convert its inventory into cash. This tells a lot about the inventory management skills of the store chain and has a significantb effect on the profitability of the company.

In case of an insurance company, there would no or a very insignificant amount of inventory. Also, the inventory held by an insurance company would be for the use of its employees and not for manufacutring or resale purpose. Thus, analyzing the inventory turnover of an insurance company would throw little or no light on the efficiency and profitability of the company.

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