Analyzing ratios

One of the most important applications of ratio analysis is to compare a companys performance with that of other players in the industry or to compare its own performance over a period of time. Such analyses are referred to as a comparative analysis and trend analysis, respectively.

A common size analysis requires the representation of financial statement data in terms of a single financial statement item (or base account or value).

What is the most commonly used base item for a common size income statement?

Net sales

Total liabilities

Stockholders equity

Total assets

Suppose you are conducting an analysis of the financial performance of Blue Hamster Manufacturing Inc. over the past three years.

The company did not issue new shares during these three years and has faced some operational difficulties. The company has thus pilot tested some new forecasting strategies for better operations management. You have collected the companys relevant financial data, made reasonable assumptions based on the information available, and calculated the following ratios.

	Ratios Calculated
	Year 1	Year 2	Year 3
Price-to-cash-flow	5.80	7.54	8.44
Inventory turnover	11.60	13.92	15.59
Debt-to-equity	0.20	0.21	0.25

Based on the preceding information, your calculations, and your assumptions, which of the following statements can be included in your analysis report? Check all that apply.

Blue Hamster Manufacturing Inc.s ability to meet its debt obligations has worsened since its debt-to-equity ratio increased from 0.20 to 0.25.

The companys creditworthiness has improved over these three years as evidenced by the increase in its debt-to-equity ratio over time.

A plausible reason why Blue Hamster Manufacturing Inc.s price-to-cash-flow ratio has increased is that investors expect higher cash flow per share in the future.

The market value of Blue Hamster Manufacturing Inc.s common shares declined over the three years.