5. Analyzing ratios Aa Aa One of the most important applications of ratio analys

Question

5. Analyzing ratios Aa Aa 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 referred to as a comparative analysis and trend analysis, respectively A common size analysis requires the representation of financial statement data relative to a single financial statement item (or base account or value) What is the most commonly used base item for a common size balance sheet? Net income O Net sales O Total assets Earnings before interest and taxes Suppose you are conducting an analysis of the financial performance of Blue Hamster Manufacturing Inc. over the past three years The company did not issue new shares during these three years, and has faced some operational difficulties The company has thus pilot tested some new forecasting strategies for better operations management. You have collected the company's relevant financial data, made reasonable assumptions based on the information available, and calculated the following ratios Ratios Calculated Year 1 Year 2 Year 3 Price to cash flow 2.00 2.60 2.91 Inventory turnover 4.00 4.80 5 Debt to equity 0.50 0.53 0.64 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 Blue Hamster Manufacturing Inc.'s ability to meet its debt obligations has worsened since its debt-to-equity ratio increased from 0.50 to 0.64 A plausible reason why Blue Hamster Manufacturing Inc.'s price-to-cash-flow ratio has increased is that investors expect higher cash flow per share in the future An improvement in the inventory turnover ratio could likely be explained by the new sales-forecasting strategies that led to better inventory management The company's creditworthiness has improved over these three years as evidenced by the increase in its debt-to-equity ratio over time

Explanation / Answer

The most common would be Total assets.
All others are not applicable as:
Net income, Net sales and EBIT are all income statement items

First statement is correct as there is more debt per unit of equity
Second statement is correct as it is plausible as there may be good prospects for future.
Third statement is correct as invesntory turnover has increased
Fourth option is not applicable as crediworthiness has decreased.

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