One of the most important applications of ratio analysis is to compare a company
ID: 2811689 • Letter: O
Question
One of the most important applications of ratio analysis is to compare a company's performance with that of other players in the industry or to compare its own performance over a period of time. Such analyses are refered to as comparative and trend analysis, respectively Common size analysis requires the representation of financial statements in relation to a single financial statement item or base. What is the most commonly used base item for a common size balance sheet in the analysis? Earnings before interest and taxes O Net income Net sales O Total assets Suppose you are conducting a common size analysis of Harrington Horticulture Co.'s past three years' performance Ratios Calculated The company did not issue new shares in these three years and has face company has thus piloted some new forecasting strategies for better operations management. You have collected relevant data, made reasonable assumptions based on the information available, and calculated the following ratios Year 1 Year 2 Year 3 d some operational difficulties. The Price to cash flo Inventory turnover Debt to equity 6.80 8.84 9.90 13.60 16.32 18.28 0.30 0.32 0.38 Based on the preceding information, your calculations, and your assumptions, which of the following statements can be included in your analysis report? Check all that apply Harrington Horticulture Co.'s ability to meet its debt obligations has worsened since its debt-to-equity ratio increased from 0.30 to 0.38 The market value of Harrington Horticulture Co.'s common shares declined over the three years An improvement in the inventory turnover ratio could likely be explained by the new sales-forecasting strategies, which led to a better inventory turnover rate A plausible reason why Harrington Horticulture Co.'s price-to-cash-flow ratio has increased is that investors expect higher cash flow per share in the futureExplanation / Answer
1) Total assets
While making common size statements, we divide each asset and liability by Total assets.
2) First statement : Debt equity ratio does not show the company's ability to meet its debt obligations. It just shows the amount of debt relative to the equity component. Not to be included.
Second statement : We can't say about market value as market price is not given. Not to be included.
Third statement : This statement can be included. Inventory turnover rate has in fact improved.
Fourth statement : This statement can also be included. The company is facing operational difficulties and increase in Price-to-cash flow ratio suggests that the investors expect higher cash flow in the future.
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