The current ratio measures the liquidity of the firm for the purpose of making an analysis of its short term financial position and to determine the ability of the firm in meeting its short term financial obligations.
Acid-Test Ratio: The acid test ratio is the alternate to measure liquidity of the firm. This does not include Inventories and Prepaid Expenses in current assets to avoid uncertain liquidity values.
Inventory Turnover Ratio: This ratio determines the firm's ability to manage its inventory over a period. Particularly, it determines turnover of stock or inventory in a particular period of time and speed with which stock is converting to sales.
A/R Turnover: Receivables Turnover Ratio indicates the ability of a firm to quickly collect its accounts receivables. This shows the actual turnover of debtors with a firm.
A/P Turnover: Accounts Payable Ratio shows the turnover of creditors, means the overall credit benefited by the firm.
Total Asset Turnover Ratio: This measures the efficiency of a firm to employ its assets to generate sales.
Return on Equity: This ratio is mainly significant to shareholders and it measures the returns which are used for paying out dividends to these shareholders.
Return on Assets: This ratio measures the returns and profits earned by a firm for employed assets. The intensity of assets to generate profit for the company.
Operating Profit Margin: This determines the operational efficiency of a firm, which is the proportion of revenue converting into income.
Dividend Payout Ratio: This ratio determines the extent to which earnings generated per share are used for paying dividend per share and the portion is used back in the business.
Debt-Equity Ratio: The ratio determines the proportion of claims of owners and external outsiders over the firm's assets. The actual picture of liquidation of the company is determined.
Interest Coverage Ratio: This ratio indicates the firm's ability to earn profits in order to pay interest charges to the lender.
Capital Gearing Ratio: This ratio is used to examine the capital structure, especially by focusing on relationships of long term finances (THE SKYLINE CORPORATION CASE).
Question 2:
Following are the Ratios those are valuable for entities as a basis for decision regarding Skyline Corp. -
West - City Bank:
Debt- to - Equity Ratio
Interest Coverage Ratio
Capital Gearing Ratio
These are three ratios which are considered while analyzing debt as these ratios will examine the overall capital structure of the company, how effectively interests can be paid from the income generated and total current loans on total assets.
Hondas Company:
Inventory Turnover Ratio
A/P Turnover Ratio
Total Assets Turnover Ratio
These ratios will be assessed by the supplier (Hondas Company) while extending credit to the Skyline Corp as these will indicate the efficiency of Skyline with which it is converting its assets into sales.
McLennan Trust:
Operating Ratio
Return on Equity Ratio
Dividend Payout Ratio
At the time of formulation of portfolio of stocks, McLennan Trust will consider these ratios owing to the fact that these ratios determine the overall profitability and effectiveness of Skyline Corp.
Working Capital Management Committee:
Current Ratio
Acid-Test Ratio
These ratios will help to measure the capacity of Skyline to pay its short term obligations and the extent to which it is managing short term borrowings and rotations (THE SKYLINE CORPORATION CASE).
Question 3:
Figure 1:
(Please Refer to Appendix)
Analysis: These are the liquidity ratio that shows that Skyline Corp's Weakness in paying short term liabilities. The Skyline Corp is certainly facing several difficulties in paying short term liabilities.
Figure 2:
(Please Refer to Appendix)
Analysis: These are the activity ratios which indicate that Skyline is ineffective in employing its resources. Indeed, the trend is showing Weakness in terms of assets is being turned over into sales.
Figure 3:
(Please Refer to Appendix)
Analysis: The trend of these profitability ratios determines that Skyline Corp has Strength in terms of generation of profitability and maintenance of its overall effectiveness.
Figure 4:
(Please Refer to Appendix)
Analysis: The long term solvency of Skyline Corp is depicted as the company will face difficulty in attracting additional capital for its business. The reason being it's Weakness in generating adequate cash for meeting debt obligations (THE SKYLINE CORPORATION CASE).
Question 4:
Additional Financial Ratios Information Required for Each Reviewer:
West - City Bank:
No additional information required pertains to financial ratios for West-City Bank as information is sufficient in making out the decision to approve a loan for the tenure of 5 years (THE SKYLINE CORPORATION CASE).
Hondas Company:
Additional Financial Ratio Information required is -
Average Payment Period -
(Trade Creditors * Number of Days)/Net Credit Purchase
To determine the time taken by the company to make payment to its creditors before extending credit to the Skyline Corp (Accounting Ratios).
McLennan Trust:
Additional financial ratios that are required are outlines below -
Earnings Per Share (EPS) Ratio -
(Net Profit after Tax - Preference Dividend)/Number of Equity Shares (Common Shares)
To determine and compare earnings generated by companies those are operating in the same industry.
Price - Earnings Ratio -
(Market Price per Equity Share)/Earnings per Share
To estimate the value of Skyline Corp shares to take decision in regard of making investment in the particular stock (Accounting Ratios).
Working Capital Management Committee:
No additional information required pertains to financial ratios for the committee as information is sufficient while making review of working capital position of the company (THE SKYLINE CORPORATION CASE).
Question 5:
Ethical Issues emerging in the Scenario:
While exploring the case study and situations within the Skyline Corp, it was determines at a place that in the production department, workers are being forced to work in double shifts beyond their capacities. This is certainly unethical in the eyes of labor laws of the respective country as no organization or company can extend the working hours beyond the standard working hours of labor laws (THE SKYLINE CORPORATION CASE).
References:
Accounting Ratios. (n.d.). Retrieved September 24, 2012, from http://www.accounting4management.com/financial_statement_analysis_accounting_ratios.htm
THE SKYLINE CORPORATION CASE. (n.d.).
