DAQUIOAG, DIANA REESE M. BSAC 3 FINMAN A August 17, 2023 Required: Compute the following ratios for the years 2020 and 2021and interpret them. 1. Current Ratio πΆπ’πππππ‘ π ππ‘ππ = πΆπ’πππππ‘ π΄π π ππ‘π ÷ πΆπ’πππππ‘ πΏπππππππ‘πππ 2020: 642π Current Ratio = 543π = 1.18232 2021: 708π Current Ratio = 540π = 1.31111 Interpretation: ο· The current ratio increased by 0.51 in 2021. The increase means that the business is doing good because its current asset is greater than its liabilities. Hence, the company has enough current assets to pay its short-term liabilities. 2. Quick Ratio ππ’πππ π ππ‘ππ = πΆπ’πππππ‘ π΄π π ππ‘π − πΌππ£πππ‘πππ¦ πΆπ’πππππ‘ πΏπππππππ‘πππ 2020: 642π−393π Quick Ratio = 543π = 0.45856 2021: 708π−422π Quick Ratio = 540π = 0.52962 Interpretation: ο· When it comes to the quick ratio, the higher it is, the better. A ratio of 1 or more shows your company has enough liquid assets to meet its short-term obligations. The quick ratio increased in 2021 but it is still insufficient to pay its current liabilities. 3. Receivable Turnover π πππππ£ππππ ππ’ππππ£ππ = πππππ ÷ π΄ππππ’ππ‘π π πππππ£ππππ 2020: 2,311π Receivable Turnover = 165π = 14.00606 2021: 2,872π Receivable Turnover = 188π = 15.27659 Interpretation: ο· A high ratio is better since it indicates that the company's receivables are collected on a consistent and efficient basis, and the company has a solid client base that pays its bills on time. As shown in the data above, the company has a high receivable turnover ratio and it even increased in 2021. As a result, the company is efficient in collecting receivables, and its customers pay on time. 4. Average Collection Period π΄π£πππππ πΆππππππ‘πππ ππππππ = π΄ππππ’ππ‘π π πππππ£ππππ π΄πππ’ππ πππππ ÷ 365 2020: 165π Average Collection Period = 2,311π÷365 = 26.06014 2021: Average Collection Period = 188π 2,872π÷365 = 23.89275 Interpretation: ο· The average collection period is the amount of time it takes a company to convert its trade receivables to cash. The shorter the average collecting period, the better for the business. It signifies that a company's customers pay their debts more quickly. As shown above, the ratio has decreased significantly from 2020 to 2021, implying that, while it is still rather high, if it continues to fall over time, it will produce excellent outcomes for the business. 5. Inventory Turnover Ratio πΌππ£πππ‘πππ¦ ππ’ππππ£ππ π ππ‘ππ = πΆππ π‘ ππ πΊππππ ππππ ÷ πΌππ£πππ‘πππ¦ 2020: 1,344π Inventory Turnover Ratio = 393π = 3.41984 2021: 1,685π Inventory Turnover Ratio = 422π = 3.99289 Interpretation: ο· The inventory turnover ratio indicates how well a company sells its inventory. It follows that the higher the ratio, the better. As illustrated above, the ratio grew in 2021, approaching the ideal ratio of 4 to 6. It is vital to highlight that a high ratio is also harmful because the corporation must constantly restock inventory, which could lead to shortages of products. 6. Fixed Asset Turnover πΉππ₯ππ π΄π π ππ‘ ππ’ππππ£ππ = 2020: 2,311π Fixed Asset Turnover = 2,731π πππππ πππ‘ πΉππ₯ππ π΄π π ππ‘ = 0.84621 2021: 2,872π Fixed Asset Turnover = 2,880π = 0.99722 Interpretation: ο· The fixed asset turnover ratio reflects a company's efficiency in producing sales from its existing fixed assets. A greater ratio indicates that management is making better use of its fixed assets. Although the company's ratio remains insignificant, it has improved as it expanded in 2021. 7. Total Asset Turnover πππ‘ππ π΄π π ππ‘ ππ’ππππ£ππ = πππππ ÷ πππ‘ππ π΄π π ππ‘π 2020: 2,311π Total Asset Turnover = 3,373π = 0.68514 2021: 2,872π Total Asset Turnover = 3,588π = 0.80044 Interpretation: ο· A total asset turnover ratio of below one indicated that the company's total assets were not generating enough income at the end of the year and were not being used efficiently to create sales. The data shown simply means that the company produces $0.68514 in revenue for every dollar in assets in 2020 and $0.80044 in 2021. 8. Debt-to-Asset Ratio π·πππ‘ − π‘π − π΄π π ππ‘ π ππ‘ππ = πππ‘ππ πΏπππππππ‘πππ ÷ πππ‘ππ π΄π π ππ‘π 2020: 1,074π Debt-to-Asset Ratio = 3,373π = 0.31841 2021: Debt-to-Asset Ratio = 997π 3,588π = 0.27788 Interpretation: ο· A ratio less than one indicates that a bigger share of a company's assets are backed by equity, or that there are more assets than liabilities incurred during the period. XYC Inc. has a favorable ratio, which indicates that the company is in a stable financial position. 9. Times Interest Earned Ratio ππππ πΌππ‘ππππ π‘ πΈπππππ π ππ‘ππ = πΈπππππππ π΅πππππ πΌππ‘ππππ π‘ πππ πππ₯ππ ÷ πΌππ‘ππππ π‘ πΈπ₯ππππ π 2020: 276π Times Interest Earned Ratio = 141π = 1.95744 2021: 402π Times Interest Earned Ratio = 120π = 3.35 Interpretation: ο· The sufficient time interest earned ratio figure is one that is at least 2 or 3. In 2020, the company is under these figures but it increased significantly in 2021, indicating that the company can cover the interest expense on its liabilities in the next year. 10. Net profit Margin πππ‘ ππππππ‘ ππππππ = πΈπππππππ π΄π£πππππππ πππ πΆπππππ ππ‘πππβπππππ ÷ πππππ 2020: 89.1π Net Profit Margin = 2,311π = 0.03855 2021: 186.1π Net Profit Margin = 2,872π = 0.06479 Interpretation: ο· The net profit margin measures how much of a company's earnings are converted into profits. A low profit margin suggests a limited margin of safety, which means that a drop in sales is more likely to wipe out profits and result in a net loss. Net profit margin reveals information about a company's pricing policies, cost structure, and production efficiency, which the data above illustrates for XYC Inc.
