Ratio Analysis

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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.

Income Statement Year 2010

Net sales	$795
Cost of goods sold	660
Gross profit	135
Selling expenses	73.5
Depreciation	12
EBIT	49.5
Interest expense	4.5
EBT	45
Taxes (40%)	18
Net income	27

1. Calculate the following ratios AND interpret the result against the industry average:

Ratio	Your Answer	Industry Average	Your Interpretation (Good-Fair-Low-Poor)
Profit margin on sales		3%
Return on assets		9%
Receivable turnover		16X
Inventory turnover		10X
Fixed asset turnover		2X
Total asset turnover		3X
Current ratio		2X
Quick ratio		1.5X
Times interest earned		7X

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.