What are the limitations of financial ratios what do

Question

1. Explain how the credit analyst's focus will differ from the investment analyst's focus.

2. What are the limitations of financial ratios?

3. What do liquidity ratios measure? Activity ratios? Leverage ratios? Profitability ratios? Market ratios?

4. How is the Du Pont System helpful to the analyst?

5. Eleanor's Computers is a retailer of computer products. Using the financial data pro- vided, complete the financial ratio calculations for 2013. Advise management of any ratios that indicate potential problems and provide an explanation of possible causes of the problems.

				Industry Averages
Financial Ratios	2011	2012	2013	2013
Current ratio	1.71X	1.65X		1.70X
Quick ratio	0.92X	0.89X		0.95X
Average collection period	60 days	60 days		65 days
Inventory turnover	4.20X	3.90X		4.50X
Fixed asset turnover	3.20X	3.33X		3.00X
Total asset turnover	1.40X	1.35X		1.37X
Debt ratio	59.20%	61.00%		60.00%
Times interest earned	4.20X	3.70X		4.75X
Gross profit margin	25.00%	23.00%		22.50%
Operating profit margin	12.50%	12.70%		12.50%
Net profit margin	6.10%	6.00%		6.50%
Return on total assets	8.54%	8.10%		8.91%
Return on equity	20.93%	20.74%		22.28%

Income Statement for Year Ended 12/31/13               Balance Sheet at 12/31/13

Sales	$1,500,000	Cash	$125,000
Cost of goods sold	1,200,000	Accounts receivable	275,000
Gross profit	$ 300,000	Inventory	325,000
Operating expenses	100,000	Current assets	$ 725,000
Operating profit	$ 200,000	Fixed assets (net)	$ 420,000
Interest expense	72,000	Total Assets	$1,145,000
Earnings before tax	128,000	Accounts payable	$ 150,000
Income tax (40%)	51,200	Notes payable	225,000
Net Income	$76,800	Accrued liabilities	100,000
		Current liabilities	475,000
		Long-term debt	400,000
		Total liabilities	$ 875,000
		Equity	270,000
		Total liabilities and equity	$1,145,000