Ratio Analysis

Question 1

when might it be okay to have a low CR?

Answer 1

• when you are a retailer (medium inventory, low receivables, high payables) due to quickly selling inventory for cash (high inventory turnover)

businesses with long WC cycle like manufacturers have higher CR (

Question 2

who might want a slightly higher CR and ATR to be safe?

Answer 2

businesses in industries facing low inventory turnover and rapid rate of obsolescence like technology

Question 3

when might it be okay to have a lower ATR?

Answer 3

retailers, for e.g. since most of their current assets are made up of inventories but they have a quick turnover and sell them for cash regularly

Question 4

why is profit =/= profitability?

Answer 4

Profitability is a measure of an organization’s profit relative to its expenses, while profit is an absolute value

Organizations that are more efficient will make more profit as a percentage of its expenses than a less-efficient organization, which must spend more to generate the same profit –> should consider profitability and not profits

can analyse by comparing profits to profitability if appropriate

a company can generate a profit but still remain unprofitable, while profitability will usually increase profits

Question 5

GPM indicates how effectively…

Answer 5

managers have ADDED VALUE to the COGS, reflected in final selling price which will increase the difference b/w COGS and revenue, which will lead to higher profits PROVIDED costs are constant

Question 6

reasons for low GPM

Answer 6

• adopting low price strategy to increase sales (including dynamic pricing)
• having high COGS due to higher raw material or wage costs (could be due to poor management of costs)