Howser Ltd. is a manufacturer of electronic components and accessories with total assets of £20,000,000. Selected financial ratios for Howser and the industry averages for firms of similar size are presented below.

Howser is being reviewed by several entities whose interests vary, and the company’s financial ratios are a part of the data being considered. Each of the parties listed below must recommend an action based on its evaluation of Howser’s financial position.

Citizens National Bank. The bank is processing Howser’s application for a new 5-year term note. Citizens National has been Howser’s banker for several years but must reevaluate the company’s financial position for each major transaction.

Charleston Company. Charleston is a new supplier to Howser and must decide on the appropriate credit terms to extend to the company.

Shannon Financial. A brokerage firm specializing in the shares of electronics firms that are sold over-the-counter, Shannon Financial must decide if it will include Howser in a new fund being established for sale to Shannon Financial’s clients.

Working Capital Management Committee. This is a committee of Howser’s management personnel chaired by the chief operating officer. The committee is charged with the responsibility of periodically reviewing the company’s working capital position, comparing actual data against budgets, and recommending changes in strategy as needed.

Instructions

a. Describe the analytical use of each of the six ratios presented above.

b. For each of the four entities described above, identify two financial ratios, from those ratios presented in Illustration 24A.1, that would be most valuable as a basis for its decision regarding Howser.

c. Discuss what the financial ratios presented in the question reveal about Howser. Support your answer by citing specific ratio levels and trends as well as the interrelationships between these ratios.

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2022 Howser Industry 2020 2021 2022 Average Current ratio 2.09 2.27 2.51 2.24 Quick ratio 1.15 1.12 1.19 1.22 Inventory turnover 2.40 2.18 2.02 3-50 Net sales to equity 2.75 2.80 2.95 2.85 Net income to equity 0.14 0.15 0.17 0.11 Total liabilities to equity 1.41 1.37 1.44 0.95