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Horngren & Harrison: Accounting and Finance

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Horngren & Harrison: Accounting and Finance

Evaluation of the ratios

According to Horngren & Harrison (2009), the current ratio for the company declined from 1.86 to 1.77% indicating that the company’s ability to pay its short term obligations has waned, though to a small margin. However, looking at the average for the industry, it is apparent that the company has a weak current ratio. The acid test ratio is used to indicate the ability of the company to pay its short term obligations using its immediate cash. The company’s acid test ratio for the year 2012 showed a decline from its previous level which is indicative of an emerging problem.

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The inventory turnover is used to show the number of times in which the inventory in the company is changed. Looking at the inventory turnover for the two periods, it is apparent that it declined from 6.1 to 1.4%. The company should view this as a threat, and it should take a remedial action as soon as possible. The accounts receivable turnover is used to indicate how fast the debtors pay their obligations to the company. Therefore, a higher rate is indicative of better payments by the debtors. The accounts receivable turnover declined from 32.2 to 20.4%. The company should view this as a likely weakness.

The day’s sales receivable are used to indicate the average number of days that the debtors take to pay their obligations to the company. The company day’s sale in receivables increased from 11.1 to 17.9 % notifying that the company credit policy should be reviewed as it is deficient. Therefore, the company should view this as a threat as well.

The debt ratio is used to show the extent of debt in the company relative to its assets. The debt ratio for the company increased though marginally, from 28.34% to 29.94%. The company should take this as strength for the company. The times interest earned ratio is used to show the ability of the company to pay its interest obligations on a pre-tax basis. The times interest earned ratio for this company went up, consequently, this should be viewed as the strength.

The rate of return on net sales indicates the part of profit that is attributable to one dollar sales. The rate of return on net sales rose from 5.43% to 6.13%. The company should view this as a strength as well. On the other hand, the rate of return on the total assets is used to show how efficient the company is in utilizing its assets to generate profit. The rate of return on assets increased marginally. The company should view this as a satisfactory condition.

The rate of return on common stockholders’ equity is used to show how well the company is utilizing the investments by its common stockholders to generate profit for the company. The rate declined for the company indicating that the company is less efficient in the manner in which it utilizes the investment by its common stockholders. The company should start to view this issue as an emerging threat. The earnings per share of common stock are used to show the portion of net earnings that will be allocated to each share held by the common stockholders. The company registered an increase in this ratio. For this reason, the company should take this as one more strength.

The price per earnings ratio is used to show the price of the stock relative to the earnings per share. For this reason, a higher ratio is indicative of better prospects for the common shareholders in terms of dividends. The company’s price earnings ratio increased. For this reason, the company should view it as a strength. The company registered an increase in this ratio viewing this as extra strength for the company.

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Comparison of the ratios

Looking at the current ratio for the company, it is apparent that the company is not doing very well. Similarly, the acid test ratio is lower than the ratio provided for the other firms in the same industry. At the same time, the inventory turnover for the company is way below the ratios for the companies that are in the same industry. It can also be said that the accounts receivable turnover is below the benchmark rates for the other companies in the same industry.

The day’s sale in receivables is higher than the one for the other companies. This is indicative of the fact that the company’s credit policy is wanting. The debt ratio for the company is also way below what some companies in the industry have indicating that the company policy on debt is sound. However, the times interest earned ratio is higher indicating that the company’s ability to pay its interest obligation from its earnings before interest and tax is satisfactory. The rate of return on net sales is within the same average as that provided by the other companies. Additionally, the company’s rate of return on the total assets is favorable since it is not lower than that of the other companies.

The rate of return on common stockholders’ equity is comparably higher than that of the other companies signaling that the company is efficient in using its equity capital. The earnings per share for the company are at the same level as in other companies. The price earnings ratio for company G is higher than that of the other firms in the same industry. In addition, the book value per share of common stock is almost the same as that for the other companies.

Reference List

Horngren, C. T., & Harrison, W. T. (2009). Accounting (7th Ed). Upper Saddle River, NJ: Prentice Hall.

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