TO: John Smith, Chief Executive Officer
FROM: WGU Student
DATE:
SUBJECT: Company G Financial Evaluation
Ratios and trends are a good indication of a company’s overall health. They can be quickly compared to the ratios and trends of competitors to evaluate Company G’s standing in the economy. Understanding the ratios and trends can identify possible trouble areas, as well as verify the areas of the business that is doing well. This will allow Company G to make necessary corrections in order to avoid any downfall in the future, and attract future investors.
Current Ratio
The current ratio is a good indication of whether the company can pay its current liabilities with its current assets (Horngren, Harrison, & Oliver, 2008, p.755); a higher ratio indicates a higher probability that the company can pay all its current liabilities with its current assets. This is determined by dividing current assets of $66,867,000 by current liabilities of $19,706,000 to equal 1.80. When compared to year 11 there is a decrease from 1.84 to 1.80. The median quartile for the home center industry is 2.1, which is higher than the 1.80 for year 12. The 1.80 ratio also clearly falls below the industry high quartile of 3.1. However, the year 12 ratio does fall above the low quartile for the industry. This indicates that a ratio of 1.80 is a weakness for company G and steps should be taken to improve this ratio.
Acid-Test Ratio
The acid-test ratio indicates a company’s ability to pay its liabilities if they came due immediately (Horngren et al., 2008, p 756). The formula is cash and cash equivalents + short term investments + account receivable net / current liabilities. A higher ratio yields a better outcome. For year 12 the acid test is $4,050,000 + $36,000 + $2,638,000 / $19,706,000 which equal 0.43. Year 11 is 0.64 which shows a decline in the acid-test ratio. The industry high quartile is 1.6, the median at 0.9, and the low at 0.6. Year 12 falls below all...