QUESTION 5 Certain financial ratios for Elite Beauty for its most recent year ar

Question

QUESTION 5 Certain financial ratios for Elite Beauty for its most recent year are given below, along with the average ratios for its industry. Based on those ratios, answer the following. Each question is meant be answered in a few sentences. a. Does Elite Beauty seem to prefer to finance its assets with debt or with equity? How can you tel? What percent of its assets are funded with debt? What percent of its assets are funded with equity (10 points) A supplier to Elite Beauty sells merchandise to them and asks to be paid within 60 days. While any of Elite Beauty's financial ratios might be of interest to the supplier, which of the ratios listed below do you think would likely be the most important one to the supplier? Why7 (10 points) b. c. Which of the ratios presented suggest that, compared to its industry, Elite Beauty may have a problem controlling its operating expenses? How can you tell? Your answer should clearly ndicate that you understand why the ratio that you chose answers this question. (10 points) Here is the data for Elite Beauty and its industry Elite Beauty 2.1 0.9 2.1 X 7.0% 31.5% 5.6% Industry Financial Ratios Current ratio Quick ratio Inventory turnover Operating profit margin Debt ratio Return on equity 0.9 0.5 5,8 X 13.0% 25.9% 17.4%

Explanation / Answer

a. Elite Beauty prefers debt financing over equity, as you can see the company’s debt ratio is 31.5% which is higher than the industry standard of 25.9%. Percentage of assets funded using equity is 68.5%(1-31.5%) and using debt it is 31.5%.

b. Current Ratio and Inventory Turnover ratios would be important for the supplier to see whether the company has enough liquidity to paid within 60 days. Current Ratio is Current Assets/Current Liabilities. The ratio greater than 1 indicates that the company's has liquid cash to serve its creditors (i.e. supplier).

c. Yes, the company is finding it difficult to cop up with the operating expense. The reason is, if you look at the difference in current ratio and quick ratio, which is significantly higher than the industry standard. The high difference indicates that the company has higher proportion of inventory, which translates into lower inventory turnover. From these two ratios, we have figured out that the company is generating enough sales, however, it is inventory which is turning the ratio(inventory turnover) down.

Since the company's Operating Profit Margin is lower, we can assume that despite the company is generating enough sales, it is not able to generate enough margin (7%) due to high operating expenses, which is below industry standard of 13%.

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