G. You know the following. ATO, ITO and FATO are 2, 6, and 2.5 respectively whil

Question

G. You know the following. ATO, ITO and FATO are 2, 6, and 2.5 respectively while for the industry they are 4.4, 19 and 4 respectively. The current ratio and quick ratio are 1 and 1.5 for the firm and 2.3 and 2.0 for the industry respectively. Net profit margin is 1% and 5% respectively. The ROE is 2% and 10% respectively. The average collection period and the average payment period are 10 and 45 days respectively while for the industry they are 30 and 30 respectively. Evaluate the firm. SHOW WORK AND FORMULA STEP BY STEP

Explanation / Answer

current ratio = current assets / current liabilities

firm = 1 and industry = 2.3, that means the industry has more currents assets over its current liabilities

CR of industry is good

quick ratio = current assets- inventory / current liabilities

firm's CA over inventory is 1 wheras industry is 2, that means industry has more liquidity as compared to firm

Net profit margin = net profit / turnover * 100

firm net profit margin = 1% wheras industry = 5% which means industry is earning more proft and turnover of industy is good as compared to firm

ROE= return (net income) / total assets(shareholders fund)

firm ROE =2% and industry = 10% which means industy is earnling more

average collection period = average debtor / credit sale * 365

firm ACP =10 days and industy ACP = 30 days which mean firm would collect payment from debtor within 10days wheras indusrty in 30days

average payment period = average creditor / COGS * 365

firm APP =45 days and industy ACP = 30 days which mean firm delay in payment of creditors by 45days wheras indusrty in 30day

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