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Sales questions

Students name

Institution affiliation
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Financial ratio analysis helps us determine the solvency, liquidity, and profitability. It

helps to determine if the business is doing well (Monea, 2009). The analysis helps gain

insight of the performance of the organization which can help to predict the future of the

business. The following is a financial ratio analysis of XYZ business. We are going to look at

the short term ratios, profitability ratios, assets utilization and short term ratios or solvency

ratio. The following are financial statements that will be used in the analysis.

Balance Sheet of M/s Kapoor and Co. as of December 31, 2017, and December 31,

2018.

Income Statement of M/s Singhania and co. as of December 31, 2017, and December

31, 2018.
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Short term solvency

We will start with the current ratio. This ratio will tell us that solvency state of the

company. solvency ratio is calculated using the following formula.

current assets
current ratio=
current liabilities

From the financial statements above, the current ratio of the company is

103800
=1.98 this ratio means that the company is able to pay all its debts. This is because
52400

the assets are 1.98 more than the liabilities but the company’s financial strength is not that

good because the current assets cannot cover twice the current liabilities.

Assets utilization

The next ratio is the inventory turnover ratio. This ratio will help us determine if the

company is overstocking or insufficient inventory. A good ratio should be somewhere

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between 5 and 10 where anything below 5 indicates overstocking while anything above 10

might indicate strong sales or insufficient inventory. The calculation is done as follows.

cost of goods sold

inventory turnover=
inventory

170000
inventory turnover= =5.3125
32000

The inventory turnover ratio is 5.3125 which indicates that the business is doing well

in inventory management and in sales.

The next ratio is the receivable turnover; receivable turnover is the ratio that is used to

determine how effective the company is in terms of collecting its debts. It determines how

many days it takes for a company to collect its debts. Here is how it is calculated.

sales
receivables turnover=
accounts receivable

170000
¿ =4.067
41800

This indicates that the business recovers its debts in approximately 4 days which is

good enough. Its debts don’t last long and so the business is efficiently managing its

resources.

Profitability ratio

The profitability ratio is important in determining the financial position of a company

(Kemal, 2011). The profit margin simply determines the profitability of the business. It

indicates how many cents a business makes for a dollar sale. A profitability ratio of 10 is

considered good while 5 and 20 are considered low and high respectively. The following is

how it is calculated.
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net income
profit margin= ∗100
sales

65000
¿ ∗100=38.2 %
170000

This indicates that the business is making a huge profit per sale it makes.
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References

Kemal, M. U. (2011). Post-merger profitability: A case of Royal Bank of Scotland

(RBS). International Journal of Business and Social Science, 2(5), 157-162.

Monea, M. (2009). Financial ratios–reveal how a business is doing?. Annals of the University

of Petroşani, Economics, 9(2), 137-145.