Frequently Asked Questions

Can I combine ratios on one graph?

It depends on the ratio.  Some ratios it makes sense to analyze together (current and quick ratios).  Some ratios show the same information in different ways (debt and equity ratios).  For these ratios, you can combine them on the same graph.  Be careful that the axis are the same for both graphs.  For instance, the A/R Turnover ratio and the Days Sales Uncollected are closely related but are not measured in the same units – one is a ratio and one is in days.  They could be combined but you would need a left and right axis.

Can I combine my analysis of ratios?

Where it makes sense, yes.  Debt and equity ratios are inverses of each other and can be discussed at the same time.  The idea is to be clear and detailed but not repetitive.  If you find yourself repeating the same points, you could combine the analyses.

How long should it be?

As many pages as needed but no more so.  Quality not quantity!  Use the exemplars as a guide.

Do I have to do all the ratios?

You must do all that apply to your company.  If you are a service company you don’t have inventory and so you don’t have an inventory turnover ratio or a day’s sales in inventory.

I can’t find….

Current Assets Above Inventory…   This is simply the total of all assets listed above inventory on the balance sheet.  If you don’t have inventory, ask me in class what assets to look at.

Average Inventory…   take the current inventory, the previous year’s inventory and average the two.

Net Sales on Credit… Use total sales or total revenue

Cost of Goods Sold…  Find the closest expense (it may be total operating expenses) and make a note in your analysis that you couldn’t find the COGS number and explain what that means for your analysis.

I lost my ratio guide!

Here is another copy.

Below are examples of a ratio analysis at each level of performance.

Below Level 1 (Less than passing)
The ratio is increasing.

Level 1 (50%)
The ratio is increasing. This is a favourable trend for the company.

Level 2 (60%)
The accounts receivable turnover ratio shows how many times the company collects its accounts receivable during the year. Corus Entertainment’s ratio has increased over the past three years.  This is a positive development for the company.

Level 3 (70%)
The accounts receivable turnover ratio shows how many times the company collects its accounts receivable during the year. A higher ratio is preferable as it means the company is turning its accounts receivable into cash more often during the period. Corus Entertainment’s ratio has increased over the past three years.  This is a positive development for the company.  In 2006, Corus will collect its accounts receivable 4.8 times during the year.

Level 4 (80% to 100%)

The accounts receivable turnover ratio shows how many times the company collects its accounts receivable during the year. A higher ratio is preferable as it means the company is turning its accounts receivable into cash more often during the period.
Corus Entertainment’s ratio has increased over the past three years.  This is a positive development for the company.  In 2006, Corus will collect its accounts receivable 4.8 times during the year.
The increase is due to growing sales and declining accounts receivable. Both of these are favourable occurrences as they are selling more services and receiving more cash for those services allowing for better cash flow.
Advertisements