Question

For each ratio listed, identify whether the change in ratio value from 2016 to 2017 is usually regarded as favorable or unfavorable.

	Ratio	2017	2016		Ratio	2017	2016
1	Profit margin	9%	8%	5	Accounts receivable turnover	5.5	6.7
2	Debt ratio	47%	42%	6	Basic earnings per share	\(1.25	\)1.10
3	Gross margin	34%	46%	7	Inventory turnover	3.6	3.4
4	Acid test ratio	1.00	1.15	8	Dividend yield	2.0%	1.2%

Short answer

Ratio	Favorable/Unfavorable
Profit margin	F
Debt ratio	U
Gross margin	U
Acid test ratio	U
Accounts receivable turnover	U
Basic earnings per share	F
Inventory turnover	F
Dividend yield	F

Step-by-step solution

Definition of Financial Ratios

Financial ratios can be the comparison between the various line items of the financial statement. These ratios depict the financial position by providing information about liquidity, solvency, and profitability.

Ratio analysis

1. The profit margin is favorable because the increase in ratio reflects the company is generating more net income for each dollar of sales.
2. The debt ratio is unfavorable because the increase in the debt ratio reflects that larger assets are financed through debt.
3. The gross margin ratio is unfavorable because it is decreasing. It reflects the gross profit generated from each dollar of sales has declined.
4. The acid test ratio is declining, reflecting a decrease in the liquidity position of the business entity.
5. Basic earnings per share are favorable because it is increasing. It reflects that the business entity generates more income for every outstanding share.
6. The inventory turnover ratio is favorable because it is increasing. It reflects that the business entity is selling its inventory more efficiently.
7. The dividend yield ratio is favorable because it is increasing. It reflects that a higher dividend is paid to the shareholders of the business entity.