Question 1 Financial Statement Analysis (15 Marks)

Home Health, Inc., has come to Jane Ross for a yearly financial check-up. As a first step, Jane has prepared a complete set of ratios for fiscal years 2014 and 2015. She will use them to look for significant changes in the company's situation from one year to the next.

(Table 1)

Home Health, Inc., Financial Ratios Ratio 2014 2015 Current ratio 3.25 3.00 Quick ratio 2.50 2.20 Inventory turnover 12.80 10.30 Average collection period 42.6 days 31.4 days Total asset turnover 1.40 2.00 Debt ratio 0.45 0.62 Times interest earned ratio 4.00 3.85 Gross profit margin 65% Operating profit margin 14% 16% Net profit margin 8.3% 8.1% Return on total assets 11.6% 16.29% Return on common equity 21.1% 42.6% Price/earnings ratio 10.7 9.8 Market/book ratio 1.40 1.25