The Current Ratio, Returns on Sales, and Inventory Turnover - Assignment Example

The average collection period can also be referred to as the number of days the sales are tied up in the accounts receivable. Thus, the average sales per day for the four years have been increasing. A snapshot of the yearly collection period, the year 20X1’s average is half the year 20X2’s average; this is a ratio of 1:2 associated with the increase in net sales by the same ratio.

Inventory turnover measures the rate by which the inventory is used annually. From the computation, the rate at which inventory is used annually is 4, which is equal in the four years. This implies that inventory is used equally across the years.

The current ratio measures solvency. This is the ratio between current assets and current liabilities. In the year 20X1, the current ratio is 3.333 which implies that for every dollar of the current liabilities, the company has $3.333 in the current assets. For the year 20X2, the company has $1.90 in the current assets, in 20X3 the company has $1.542 and in 20X4 it has $1.339 in the current assets for every $1 of the current liabilities. This trend has been reducing from 20X1 to 20X4.

The quick ratio measures liquidity which is the number of dollars in cash and account receivable for every single dollar in the current liabilities. For the year 20X1, the company has a quick ratio of 1.333 which means that for every single dollar o current liabilities, the firm has $1.333 in cash and accounts receivable to pay the liabilities. The trend of the quick ratio decreased from year 20X1 to 20X4, 1.333, 0.7, 0.541 to 0.459.

Debt to equity measures the financial risk of the company which is the number of times dollars are owed for every single dollar in the net worth. From the computations, the year 20X1 has a quick to-equity of 1.250 which means that for every single dollar of the net worth invested by the stockholders, the company owes $1.250 of the debt to the creditors.  Hence, the trend of debt to equity for this company is increasing across the four years; 1.250, 1.714, 2.889, 3.769.

Times interest earned ratio compares the earnings of a business available to be used in paying the interest expenses on debt and the number of expenses. From the computations, we can only obtain the values for years 20X3 and 20X4. Years 20X1 and 20X1 lack interest expenses. Thus, for the year 20X3, the ratio of 87:1 is quite high and implies that the company is in a position to comfortably pay its interest obligations. This also implies the year 20X4 which has a ratio of 111:1. This trend is increasing across the years.

Fixed asset turnover measures how well the company is using fixed assets to make sales. Thus, it is a ratio of sales to the value of fixed assets. For the year 20X1, the company has a ratio of 16:1 which is relatively higher. It indicates that the firm has less money tied up in the fixed assets and it is not over-investing in the assets. The trend for this ratio is irregular across the four years as it goes down to 8 from 16, then from 8 to 15 in 20X3 and from 15 to 14 in 20X4.

Accounts payable turnover measures the rate at which the company pays the account payable annually. The ratio of 8 in the year 20X1 implies that the average volume of accounts payable was settled 8 times in the year. In 20X2, accounts payable were paid 4 times, 6 times in 20X3, and 4 times in 20X4. The trend is generally decreasing from across to 20X4.