Financial statement ratio analysis is the way to gain a better understanding and analyzing the
financial statement inputs, ratio analysis can be categorized as profitability ratio analysis,
liquidity ratio, solvency ratio, and leverage ratio.
Each ratio is indicators, liquidity ratio measuring the companies ability to cover its current
liabilities when becomes due however solvency ratios measure, the company's ability to
cover its long-term debt, and leverage ratio is an indication of the healthiness of the
companies financial positions.
1- The profit margin ratio is one of the main profitability ratios which measures the
percentage of net income from total revenue and is calculated by dividing the net income by
total revenue.
● Fashion forward = 136,500/ 2,500,000 = 5,46 %
● Dream Designs = 212,500 / 5,400,000 = 3.94 %
2- Return on assets ratio measures the company's effectiveness of using its assets to generate
profit which drives by dividing net income / total assets.
● Fashion forward = 136,500/ 2,747,000 = 4,96 %
● Dream Designs = 212,500 / 4,381,250 = 4.85 %
3- Current ratio is one of the liquidity ratios which measure the percentage of the current
assets of current liabilities.
● Fashion forward = 1,297,000/ 1,170,000 = 1,11 %
● Dream Designs = 2,280,500 / 1,625,750 = 1.40 %
4- Quick ratio is another type of liquidity ratio that measures how the company can use the
nearest cash to cover its current liability which is calculated by divided (current assets -
inventory ) / current liabilities.
● Fashion forward = 1,297,000/ 1,170,000 = 1,11 %
● Dream Designs = 2,280,500 / 1,625,750 = 1.40 %
5- account receivable turnover ratio measures the effectiveness of the company collection as
it measures how many times the account receivable is converted to cash.
It drives by dividing credit sales by average accounts receivable.
● Fashion forward = 2,000,000/(200,000+150,000)/2 = 14.29
● Dream Designs = 4,320,000 / (250,000+275,000)/2 = 16.46
6- Average collection period measures the number of days that account receivable spend
to be transferred cash during the year is derived by dividing the number of days of the year by
the account receivable turnover ratio.
● Fashion forward =365/14.29 = 25.55
● Dream Designs = 365 / 16.46 = 22.18
6- Inventory turnover ratio is the number of times the inventory has been sold during the
year.
● Fashion forward =2,500,000/(112,000+105,000)/2= 23.04
● Dream Designs = 5,400,000 / (200,000 +215,000)/2 = 6.51
7- average sales ratio measure the number of days of the inventory transferred to sales.
● Fashion forward =365/23.04= 15.84
● Dream Designs = 365/6.51 = 56.10
8- Debt to equity ratio is the financial ratio which measures the percentage of debt to equity.
● Fashion forward =1,345,000/1,402,000= .96
● Dream Designs = 1,901,250/2,480,000 = .77
In my opinion, Fashion-forward has a better profit margin and return on assets than dream
design but it has less liquidity compared to dream design.
dream design is a better position on collection of the account receivable as it has higher
account receivable turnover and lower average collection period.
And also drea design is more secure than fashion because it has a lower debt to equity ratio.
Reference.
Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers.
[Link]
Babalola, Y. A., & Abiola, F. R. (2013). Financial ratio analysis of firms: A tool for decision making.
International journal of management sciences, 1(4), 132-137.
Lumen Learning. (n.d.). The relationship between risk and capital budgeting. Boundless
Finance.
[Link]
nd-capital-budgeting/
