Question

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

Edna Millay	2017 Industry
	2015	2016	2017	Averages
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 stockholders’ equity	2.71	2.80	2.99	2.85
Return on common stockholders’ equity	0.14	0.15	0.17	0.11
Total liabilities to stockholders’ equity	1.41	1.37	1.44	0.95

Millay 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 Millay’s financial position.

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

Robert Penn Warren. A brokerage firm specializing in the stock of electronics firms that are sold over-the-counter, Robert Penn Warren must decide if it will include Millay in a new fund being established for sale to Robert Penn Warren’s clients.

Working Capital Management Committee. This is a committee of Millay’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.

Short answer

Ratios are useful for examining performance patterns over a lengthy period of time. They can also be used to compare a company's financial results to those of its competitors.

Step-by-step solution

Meaning of Financial Ratios

A financial ratio is a tool for comparing a company's financial status or output to those of competitors. It might be a tool that financial specialists use to study and collect data about a company's financial history or the whole trade division.

Describing the analytical use of each of the six ratios

The current ratio is a measurement of a company's total short-term liquidity as well as its ability to repay short-term debt.

The quick ratiomoreover could be a measure of short-term liquidity. In any case, it may be a measure of more prompt liquidity than the current proportion and is a pointer of a firm’s capacity to pay all of its immediate debts from cash or near-cash assets. The quick ratio is additionally a pointer of the degree of inventories in its current resources when compared to the current ratio.

Inventory turnover is a marker of the number of times a firm offers its normal inventory level amid the year. A low inventory turnover may show intemperate inventory amassing or out-of-date inventory.

The activity percentage of net sales to shareholders' value measures the number of times the stockholders' value was turned over in sales volume. This ratio can also be referred to as a net asset turnover ratio, which gauges net asset management. As a result, it might be a measure of operational efficiency. This percentage is in comparison to asset turnover.

Return on common stockholders’ equity may be a benefit ratio. It measures the return on stockholders’ speculation and is utilized to assess the company’s success in creating income for the advantage of its stockholders

The ratio of total liabilities to shareholders'equity compares the sum of creditors' assets to stockholders' resources. This approach assesses or judges the degree of financial hazard by measuring the degree of use within the company's financial structure. This proportion is compared to the debt-to-equity ratio.