Problem:
HH, Inc. has come to Jane Ross for a yearly financial checkup. As a first step, Jane has prepared a complete set of ratios for the fiscal years of 2008 and 2009. She will use them to look for significant changes in the company's situation from one year to the next:
1) To focus on the degree of change, calculate the year-to-year change by subtracting the year 2008 ratio from the year 2009 ratio, then dividing the difference by the year 2008 ratio. Multiply the result by 100. Preserve the positive or negative sign. The result is the percentage change n the ratio from 2008 to 2009. Calculate the proportional change for the ratios shown here.
2) For any ratio that shows a year-to-year difference of 10% or more, state whether the difference is in the company's favor or not.
3) For the most significant changes (25% or more), look at the other ratios and cite at least one other change that may have contributed to the change in the ratio that you are discussing.
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Home Health, Inc |
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Financial Ratios |
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| Ratio |
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2008 |
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2009 |
| current ratio |
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3.25 |
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3 |
| quick ratio |
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2.5 |
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2.2 |
| inventory turnover |
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12.8 |
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10.3 |
| avg collection period |
42.6 days |
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31.4 days |
| total asset turnover |
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1.4 |
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2 |
| debt ratio |
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0.45 |
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0.62 |
| times interest earned ratio |
4 |
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3.85 |
| gross profit margin |
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68% |
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65% |
| operationg profit margin |
14% |
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16% |
| net profit margin |
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8.3% |
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8.1% |
| return on total assets |
11.6% |
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16.2% |
| return on common equity |
21.1% |
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42.6% |
| price/earnings ratio |
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10.7 |
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9.8 |
| market /book ratio |
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1.4 |
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1.25 |