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
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Net sales
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$795
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Cost of goods sold
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660
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Gross profit
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135
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Selling expenses
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73.5
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Depreciation
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12
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EBIT
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49.5
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Interest expense
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4.5
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EBT
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45
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Taxes (40%)
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18
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Net income
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27
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1. Calculate the following ratios AND interpret the result against the industry average:
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Ratio
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Your Answer
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Industry Average
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Your Interpretation
(Good-Fair-Low-Poor)
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Profit margin on sales
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3%
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Return on assets
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9%
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Receivable turnover
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16X
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Inventory turnover
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10X
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Fixed asset turnover
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2X
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Total asset turnover
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3X
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Current ratio
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2X
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Quick ratio
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1.5X
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Times interest earned
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7X
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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.