Trend and general scale analysis are good sources of financial data, but managers, investors, and other

stakeholders also use a variety of metrics to assess an organization's financial performance. His second
major method of financial analysis is ratio analysis. The key figures alone do not provide information
about the company's financial position. The ratio should be compared to the industry average or the
ratio of other competitors to provide a useful analysis. (2018) Mowen et al. The four groups into which
the ratio is divided are:

1. Profitability metrics that highlight the income statement

2. A short-term liquidity indicator that highlights short-term commitments.

3. Debt-focused long-term solvency measurement.

4. Market valuation ratios that emphasize the market value of Heisinger and Hoyle's businesses are
unspecified

The table below shows how the ratios are calculated, interpreted, and compared for the two
companies.
• Profit Margin Ratio – is a profitability ratio which indicate the profit created for each dollar in net sales.

Profit margin ratio = Net income / Net sales

The ratio shows Fashion Forward produced 5.46 cents in net income for every dollar in net sales. This
ratio is slightly higher than Dream Designs’ 3.94 percent.

• Return on Assets Ratio - is a profitability ratio that used to assess how much net income was produced
from each dollar in average assets invested.

• Return on assets = Net income / Average total assets

According to the return on assets ratio, Fashion Forward generated 4.92 cents in net income for every
$1 in average assets. This ratio is somewhat higher than Dream Designs' 4.81 percent. A company's
profitability is routinely evaluated by analysts, creditors, and shareholders. According to the two ratios
that were found above, Fashion Forward is a bit more profitable than Dream Design. Undated Heisinger
and Hoyle

• Current Ratio – is a short-term liquidity ratio which shows whether an organisation has enough current
assets to cover current liabilities.

Current ratio = Current assets / Current liabilities

The current ratio shows Fashion Forward had $1.11 in current assets for every dollar in current
liabilities. This ratio is lower than Dream Designs’ 1.40 to 1 ratio. Generally, a current ratio more than 1
to 1 is acceptable, which shows the company has sufficient current assets to cover current liabilities.

• Quick Ratio – is a short-term liquidity ratio which shows whether a company has enough quick, or
highly liquid, assets to cover current liabilities.

Quick ratio = (Cash + Marketable securities + Short-term receivables) /Current liabilities

The quick ratio shows Fashion Forward had $0.98 in quick assets for every dollar in current liabilities.
This ratio is slightly higher than Dream Designs’ 0.87 to 1 ratio.

• Account Receivables Turnover Ratio - is a short-term liquidity ratio that shows how many times
receivable share collected in a given period.

Receivables turnover ratio = Credit sales / Average accounts receivable

The receivables turnover ratio indicates Fashion Forward collected receivables 11.43 times during 2018.
This ratio is lower than Dream Designs’ 16.46 times.

• Average Collection Period - the receivables turnover ratio can be changed to the average collection
period, which shows how many days it takes on average to collect on credit sales, as follows:

Average collection period = 365 days / Receivables turnover ratio

The average collection period indicates Fashion Forward collected credit sales in 31.93 days, on average.
The number of days is higher than Dream Designs’ 22.17 days. Therefore, Fashion Forward is slower at
collecting accounts receivable than Dream Designs.

• Inventory Turnover Ratio - is also a short-term liquidity ratio that indicates how many times inventory
is sold and restocked in a given period.

Inventory turnover ratio = Cost of goods sold / Average inventory

The inventory turnover ratio shows Fashion Forward sold and refilled inventory 12.9 times during 2018.
This ratio is lower than Dream Designs’ 15.66 times.

• Average Sale Period - the inventory turnover ratio can be changed to the average sale period, which
shows how many days it takes on average to sell the company’s inventory, as follows:

Average sale period = 365 days / Inventory turnover ratio

Fashion Forward sold all of their inventory in an average of 28.29 days, according to the average selling
time. The amount of days is more than the 23.31 days of Dream Designs. As a result, Fashion Forward
sells goods less quickly than Dream Designs. Heisinger and Hoyle, undated A company's ability to fulfill
immediate obligations is frequently evaluated by suppliers and other short-term creditors. According to
the aforementioned ratios, Dream Design performs marginally better in terms of fulfilling immediate
responsibilities.

• Debt to Equity – is a long-term solvency ratio which measures the balance of liabilities and
shareholders’ equity used to fund assets.

Debt to equity = Total liabilities / Total shareholders’ equity

According to Fashion Forward's debt to equity ratio, its liabilities were equal to $0.96 of its shareholders'
equity. This ratio is greater than the 0.77 to 1 of Dream Designs. Heisinger and Hoyle, undated
Companies' ability to fulfill long-term obligations is frequently evaluated by banks, bondholders, and
other long-term lenders. The firm is performing more effectively in managing its finances, thus based on
the ratio analysis, Dream Design is advised. It simply needs some help to lower its cost of sales and
operational costs as well as significantly boost its sales.

References:

1. Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers.

https://2012books.lardbucket.org/books/accounting-for-managers/index.html

2. Mowen, M. M., Hansen, D. R., McConomy, D. J., Heitger, D. L., Pittman, J. A., & Witt, B. D. (2018).
Cornerstones of managerial accounting. Toronto: Nelson