Helping answering financial statement questions
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business_performance_ratios_worksheet.xlsxCHH Business Performance Ratios
| Choice Hotels | (2017/2016)-1 | ||||
| Ratios | 2017 | 2016 | Percent change from 2016 to 2017 | Formulas | |
| Receivables turnover ratio | 8.03 | 8.61 | -7% | receivables turnover ratio = total revenue / accounts receivable | |
| Quick ratio | 1.37 | 1.31 | 5% | quick ratio = current assets / current liabilities | |
| Debt-to-assets ratio | 0.26 | 0.23 | 14% | debt-to-total assets ratio = total liabilities / total assets | |
| Debt-to-equity ratio | -5.37 | -3.74 | 44% | debt/equity ratio = total liabilities / total shareholders' equity | |
| Equity multiplier | -4.37 | -2.74 | 60% | equity multiplier = total assets / total stockholder equity | |
| Return on assets (ROA) | 0.12 | 0.16 | -24% | return on assets (ROA) = net income / total assets | |
Questions from Choice Hotels: Note: Use the ratios in your answers, and explain what the ratios mean. Note: Shareholder equity remains negative at the end of 2017. The deficit is decline. The large negative equity was caused by earlier purchases of Treasury Stock. This will make the equity multiplier, return on equity, and the debt to equity ratios meaningless. 1. To help improve our operations, comment on how we are doing with respect to asset management. Are there any areas for improvement? Asset management of the company seems to be at the average level. In short term the quick ratio results are average, but debt to asset ratios of the company indicates that almost all the assets are financed by debt which is very high-risk indicator as debtholders has complete rights on the assets of the company, which affects it's operational effectiveness. Also debt to equity ratios is negative which again shows excess of liabilities o se assets of the company. Overall the asset management of the company is very poor and requires a lot of improvement. 2. To measure our company's solvency, which of these ratios would we use and why? For Companies with deficits in shareholder equity, many analysts look to consistent strong cash flow from operations as the best indication of solvency The best ratio to measure a company’s is the solvency is debt to equity ratio and debt to asset ratio, in case of measuring short term solvency position quick ratio can be used. Yes, for companies with deficit shareholder equity, it is very important that it should have stronger operating Cash flow but if company has employed too much debt then it will not help much as those stronger Cash flows from operation will soon be drown off by the interest on debt. 3. In an effort to help us improve our overall debt situation, we would like you to provide us with an assessment of our company's solvency and leverage. What would be your plan to achieve positive equity? Company's solvency position represented by the debt to equity ratios goes to show that equity is negative, and resulting in the debtholder having little to no cushion. This means no security/reassurance that they will show a return on their funds. Ratio used to determine solvency is debt to asset ratio which is 1.42, resulting in the company having more debt than it does assets. This shows solvency condition of the company is poor. Leverage of the company is indicated by equity multiplier which is also negative for the company. 4. Why might the ratios have increased or decreased? Excessive borrowing = to make up for losses company could fill the weak liquidity position arising as a consequence of which with borrowing has led to excessive borrowing in an attempt to lower debt to equity and increase debt to at assets ratio. High compensation of dividend = it may be possible that the company is paying a high proportion of its retained earnings in the form of dividend.
