Question

One of the most important applications of ratio analysis is to compare a company's 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.
The analysis that involves calculating the growth rates of all items from the balance sheet and income statement relative to a base year is called a:
a. percentage change analysis.
b. cash flow change analysis.
c. common size income statement analysis.
d. common size balance sheet analysis.
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 company's 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 2.80 1.96 1.57
Inventory turnover 5.60 4.48 3.58
Debt-to-equity 0.60 0.48 0.38
Based on the preceding information, your calculations, and your assumptions, which of the following statements can be included in your analysis report?
A. A decline in the inventory turnover ratio can be explained by the new inventory management system that the company recently adopted, which led to more efficient inventory management.
B. Blue Hamster Manufacturing Inc.’s ability to meet its debt obligations has improved since its debt-to-equity ratio decreased from 0.60 to 0.38.
C. A plausible reason why Blue Hamster Manufacturing Inc.’s price-to-cash-flow ratio has decreased is that investors expect lower cash flow per share in the future.
D. A decline in the inventory turnover ratio could likely be explained by operational difficulties that the company faced, which led to duplicate orders placed to vendors.

Answer 1

Answer: a. percentage change analysis.

B. Blue Hamster Manufacturing Inc.’s ability to meet its debt obligations has improved since its debt-to-equity ratio decreased from 0.60 to 0.38.

D. A decline in the inventory turnover ratio could likely be explained by operational difficulties that the company faced, which led to duplicate orders placed to vendors

Explanation:

1. The analysis which has to do with the calculation of the growth rates of all items from balance sheet and the income statement which is relative to a base year is referred to as the percentage change analysis.

2. The statements that can be included in the analysis report from the question include:

• Blue Hamster Manufacturing Inc.’s ability to meet its debt obligations has improved since its debt-to-equity ratio decreased from 0.60 to 0.38

• A decline in the inventory turnover ratio could likely be explained by operational difficulties that the company faced, which led to duplicate orders placed to vendors.