A company has the following ratios: Current ratio: 0.85 Inventory to Sales Conve

Question

A company has the following ratios:

Current ratio: 0.85

Inventory to Sales Conversion Period: 180 days

Sales to Cash Conversion Period: 40 days

Purchases to Payments Conversion Period: 7 days

The accountant also reports that the gross profit margin is 15% and the next profit margin is 3%.  

Now you are being provided with this additional information on the company.

The company also has a bank line of credit that allows the company to borrow any shortfall it might have in cash. Interest on the loan is 10%. Assume the loan remained constant throughout the year.

The company has $1,000,000 of equity and $120,000 in retained earnings at the end of the year.

Sales in the most recent year were $2,500,000.

[Ignore income tax for purposes of this problem.]

Question: Based on all of the above information, will this company have a good return on equity or a poor return on equity?

Build a balance sheet and income statement financial model to prove your answer.

Explanation / Answer

A company has the following ratios: Current ratio: 0.85 Inventory to Sales Conve

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