Ratio Analysis Memo Argumentative
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To solve the debt to total assets ratios we have to find the total liabilities and assets and then divide total liabilities and assets. The formula for this is total liabilities divided by assets = 306,806/1,932,041 = .1588. Times interest earned which is: earnings before interest and taxes divided by interest expense. This is not applicable here because according to the balance sheet and income statement there is no interest expense. The low Debt/Asset ratio reveals a strong financial position. Debt/Asset ratio is important to creditors because it shows how much of the assets are being financed. Times interest earned is important to creditors because it shows the ability to pay interest on their debt. Based on this information it would a worthwhile idea to invest this company.
Berry’s Bug Blasters (BBB) has developed quickly and improved in almost every respect since its inception. The most recent data for 2008 does however waiver, which is likely due to the downturn of spending in 2008. Many of the Profitability Ratios appear better for 2006 while the ratios are indeed higher; the numbers that they correlate to are lower. There was a higher return on investment in 2006; so the numbers that they correspond to are much lower. Total Assets rose by about $1.05 Million from 2006 to 2007, and profit rose by around $370,000, so while the percentages are lower, there was substantially more money coming in during 2007 fiscal year than the 2006.
While the return on investment in the company peaked at 54% in 2006, it remained strong in 2007 at 51%. 2008 took a hit though, cutting the return almost in half down to 26% for 2008. 26% is, however still a good return. The investment could allow the company to expand its advertising to draw more customers for its market. It could also lower prices to entice more customers, switching to volume for profit rather than higher prices for a smaller group of customers.
Investment in the company is pretty neutral; not screaming for investment or frightening investment away (Peavler, 2013). Working the liquidity ratios for Berry’s Bug Blasters shows how well the company can liquidate assets to pay debts in the event the company does not earn enough revenue. The acid test, or quick test, determines this using short term assets and does not involve selling inventory. This solution is over one showing the company should be able to pay liabilities easily in the event of an emergency. ACID TEST:($818,440.68+812,395.13+0)/$306,805.71= 5.32
The current ratio shows BBB’s assets compared to its liabilities. The result of this equation is higher than normal meaning the company does not need available lines of credit for quick cash. BBB has a good amount of assets. CURRENT RATIO: ($1,836,770.12/306,805.71)=5.99=5.99:1
The receivables turnover shows the company’s rate of success collecting on credit sales. This answer gives great hope to investors. Collection is 1.00, meaning almost 100%of all accounts receivable are collected. RECEIVABLES TURNOVER:$812,395.13/811,721.29=1.00
Inventory turnover indicates the sale of inventory. Fast moving inventory benefits the company. INVENTORY TURNOVER: $1,378,203.63/205,934.30=6.69
Peavler, R. (2013). Protiablity Ratio Analysis. Retrieved July 18, 2013, from About.com: http://bizfinance.about.com/od/financialratios/a/Profitability_Ratios.htm