Refer to the income statement and balance sheet. Prepare a ratio analysis for Bowden Brake Service. In addition, use the following industry statistics for firms like Jim's to explain and interpret what these ratios mean

What will be an ideal response?

Current Ratio 1.4 : 1
Quick Ratio 0.7 : 1
Debt Ratio 1.8 : 1
Debt-to-Net Worth Ratio 1.9 : 1
Average Inventory Turnover N/A
Average Collection Period 21.22 days
Net Sales-to-Total Assets 2.8 percent
Net Sales-to-Working Capital 17.2 percent
Net Profit on Sales 9.0 percent
Net Profit to Equity 22.2 percent

Current Ratio: = 2.61
Bowden has $2.61 in current assets for every $1 in current liabilities. This surpasses both the 2:1 "rule of thumb" and the 1.4 industry median.

Quick Ratio: = .53

Bowden has .53 in quick assets for every $1 in current liabilities. This is below both the 1:1 rule of thumb and the .7 industry median. Bowden apparently relies heavily on inventory to help satisfy its short-term debt.

Debt Ratio: = .75

Compared to the industry median of 1.80, Bowden is not overburdened with debt.

Debt-to-Net Worth Ratio: = 3.0

Creditors have contributed three times as much to the business as Jim Bowden. Creditors are likely to see Bowden as being "borrowed up," especially since the industry median is 1.90.

Average Inventory: = 4.17 times per year

Bowden turns over its inventory about 4.17 times per year. A comparison is difficult since industry figures are unavailable.

Average Collection Period Ratio: = 52

= 7.02

With credit sales of $780,000, Bowden's accounts and notes receivable are outstanding for an average of 7.02 days, while the industry median is 21.22 days.

Net Sales to Total Assets Ratio: = 1.5

Bowden generates $1.5 in sales for every $1 in total assets. The industry median is 2.8. Bowden is not producing enough sales in relation to its asset size.

Net Sales to Working Capital Ratio: = 7.47

Bowden is not using working capital efficiently to produce sales. With an industry median of 17.2, the implication is that Bowden must increase sales.

Net Profit on Sales Ratio: = .077

Each dollar of sales yields 7.7 cents in profit for Bowden, below the industry median of 9.0 cents.

Net Profit to Equity Ratio: =.462

Bowden's rate of return on his investments in the business is 46.2 percent, well above the industry median of 22.2 percent. This reflects Bowden's low investment in the business.