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Finance: Ratio Analysis

solve the problem below, calculate the ratios, interpret the results against the industry average, and fill in the table on the worksheet. Then,provide an analysis of how those results can be used by the business to improve its performance.

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Income Statement Year 2010

Net sales

$795

Cost of goods sold ;

660

Gross profit ;

135

Selling expenses ;

73.5

Depreciation

12

EBIT

49.5

Interest expense ;

4.5

EBT

45

Taxes (40%) ;

18

Net income

27

1. Calculate the following ratios AND interpret the result against the industry average:

Ratio

Your Answer

Industry Average

Your Interpretation
(Good-Fair-Low-Poor)

Profit margin on sales

3%

Return on assets

9%

Receivable turnover

16X

Inventory turnover

10X

Fixed asset turnover

2X

Total asset turnover

3X

Current ratio

2X

Quick ratio

1.5X

Times interest earned

7X

2. Analysis:

Give your interpretation of what the ratios calculations show and how the business can use this information to improve its performance. Justify all answers.

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