Written Assignment 7

Financial ratio analysis is one quantitative tool that business managers use to gather valuable

insights into a business firm’s profitability, solvency, efficiency, liquidity, coverage, and market

value (Rosemary Carlson,2020). Apart from that , the information gathered can be used to

evaluate the financial health of the business.

Profit Margin Ratio = Net Income/Net Sales

Fashion Forward Profit Margin Ratio = $136,500 / $2,500,000 = 5.46

Dream Designs Profit Margin Ratio = $212,500 / $5,400,000 = 3.94

Profit margin ratio indicates the gross margin generated for each dollar in net sales.

Fashion forward is more profitable than Dream design .

Return on Assets = Net Income / Average Total Assets

Fashion Forward = $136,500/ (($2,747,000+$2,805,000)/2) = $136,500 / $2,776,000 = 4.92

Dream Design = $212,500/(($4,381,250+$4,450,000)/2) = $212,500/$4,415,625 = 4.81

Return on assets measures how efficiently a company is using its assets to generate profit.

Fashion Forward has a higher net income generated from each dollar in average assets invested.

Current Ratio = Current Assets/Current liabilities

Fashion Forward = $1,297,000/$1,170,000 = 1.11

Dream Design = $2,280,500/$1,625,750 = 1.40

Current Ratio indicates whether a company has sufficient current assets to cover current

liabilities. Dream Design is doing better than Fashion Forward in this aspect.

Quick Ratio = Quick Assets/Current liabilities

Fashion Forward = ($950,000+$200,000)/$1,170,000 = 0.983

Dream Design = ($1,710,000+$250,000)/$1,625,750 = 1.21

Quick ratio indicates whether a company has sufficient quick assets to cover current liabilities.

Dream Design has sufficient quick assets to cover current liabilities.

Account Receivable Turnover Ratio = Credit Sales / Average Account Receivable

Fashion Forward =$2,000,000/ (($2,000,000+$1,500,000)/2) = $2,000,000/$1,750,000 = 11.43

Dream Design = $4,320,000/(($2,500,000 + $2,750,000)/2) = $4,320,000/$2,625,000 = 16.46

Account Receivable ratio measures how many times a company can turn receivables into cash

over a given period. Dream Design is managing debts well .

Average Collection Period = 365 / Account Receivable Turnover Ratio

Fashion Forward = 365/11.43 = 31.93 days

Dream Design = 365/16.46 = 22.17 days

Average collection period indicates how many times receivable is collected in a given period.

Inventory Turnover Ratio = Cost of Sales / Average Inventory

Fashion Forward = $1,400,000 / (($112,000 + $105,000)/2) = $1,400,000/$108,500 = 12.90

Dream Design = $3,250,000/((200,000+$215,000)/2) = $3,250,000/$207,500 = 15.66

Inventory turnover ratio indicates how many times inventory is sold and restocked in a given

period. Dream Design is managing the inventory well.

Average Sales Period = 365/Inventory Turnover Ratio

Fashion Forward = 365/12.90 =28.29 days

Dream Design = 365/15.66 = 23.31 days

Average sales period indicates how many days it takes on average to sell the company’s

inventory . Fashion Forward will take a longer period to do so.

Debt to Equity Ratio = Total Liabilities / Total Equity

Fashion Forward = $1,345,000/$1,402,000 = 0.959

Dream Design = $1,901,250 / $2,480,000 = 0.767

Debt to Equity ratio indicates the amount of debt incurred for each dollar that owner provide.

Fashion Forward has a higher debt incurred for each dollar provide.

Fashion forward has a higher profit margin than Dream Design as Dream Design selling

expenses is twice the amount of Fashion Forward so Dream Design will need to look into ways

to reduce the cost in order to improve the profit margin ratio and return on total assets. Dream

Design has a better liquidity position ,working capital position and lower collection period .

Dream Design has a lower debt equity as compared to Fashion Forward . Fashion Forward will

have more pressure on finances if the debt increases as they are on the verge of exhausting its

debt facility . Therefore, taking into consideration of ratios above , Dream Design will be a better

option to acquire.
References

Carlson R.(2020). What is Financial Ratio Analysis . Retrieved from

https://www.thebalancesmb.com/what-is-financial-ratio-analysis-393186