Financial ratios
Comparison and interpretation
Rate of Return on Equity (ROE)
The ratio indicates the return of profitability for every one shilling of equity capital contributed by the shareholders. The 31.2% of plume incorporation means one dollar of equity generates $0.312 profit attributable to shareholders. The 14.9% ROE of Arrow company one dollar of equity generates $0.312 profit attributable to shareholders. The Arrows ROE is better than Plume because it is higher hence one dollar of equity generates more profits (Siddiqui, 2006).
Return on Assets (ROA)
The ratio indicates the return on profit from total assets. The 18.7% ROA of plume incorporation means that $10 of total assets generated $2. The 14.9% ROA of Arrow Company means that $10 of total asset generated $1.49 of net profit. The ROA of plume incorporation is better than that of Arrow Company because $10 of total asset generated more profits (Eugene and Michael 2010).
Gross profit margin
The ratio shows the ability of a firm to control cost of sales expenses. The plume incorporation gross profit margin of 44.06% means 55.94% of sales revenue was taken up by cost of sales while 44.06% was the gross profit. The Arrow company gross profit margin of 40.23% means 59.77% of sales revenue was taken up by cost of sales while 40.23% was the gross profit. Plume incorporation has a higher gross profit margin hence it means it can control its costs better than Arrow company (Eugene and Joel, 2009).
Inventory turnover
The ratio shows the times the stock was turned into sales in a year. A high stock turnover shows good performance. The inventory turnover of 4.87 times for plumes incorporation means that the company was able to turn stock to inventory 4.87 times. Arrow Company has a better inventory turnover since it was able to turn its inventory into sales 6.09 times (Eugene and Michael 2010).
Collection period
This refers to credit period that was granted to debtors on the period within which they were supposed to pat their dues. A short collection period shows high debtor turnover. Arrow Company has a collection period of 35.01 days while that of plume incorporation is 43.72 days. The arrow company collection period is shorter hence better (Siddiqui, 2006).
Fixed asset turnover
For plume incorporation, a fixed asset turnover of 1.91 means that $1 of fixed assets utilized generate $1.91 of sales. A high fixed asset turnover the shows a good performance. The fixed asset turnover of Arrow Company is high than that of Plume Corporation hence better (Eugene and Joel, 2009).
Financial leverage ratios
Debt to Assets Ratio
The ratio shows the percentage of assets that have been financed using long term and current liabilities. The debt ratio for plume incorporation is 40%. This means 40% of assets are financed through debt. A low percentage of debt to assets ratio shows a good perfomance. The debt to assets ratios of Arrow Company is 45% meaning that 45% of total assets are financed through debt. The debt to asset ratio of Plume Incorporation is better than that of Arrow Company (Eugene and Michael 2010).
Debt to Equity ratio
The ratio indicates the amount of fixed charge capital in the capital structure of the firm for every one dollar of owner equity. Plume incorporation debt to equity ratio of 0.67 means that for every $1 of equity there is 0.67 0f fixed charge. A low debt to equity ratio depicts a good performance. The debt to equity ratio of Plume Corporation is better than that of Arrow Company (Eugene and Michael 2010).
Liquidity ratios
Current ratio
The ratio shows the times current liabilities can be paid from the current assets before these assets are exhausted. The most recommended ratio is 2. The current assets must be at least be twice as high as current liabilities. The Arrow company current ratio is 2.27, and this means the current assets can pay current assets 2.27 times. The current ratio of Arrow Company is better than that of Plume incorporation (Eugene and Joel, 2009)
Acid test
The ratio indicates the ability of the firm to pay its current liabilities from the liquid assets of the firm. A high acid test ratio depicts a good performance. The acid test of Plume Incorporation is 0.97 while that of Arrow is 1.81. This means that the Acid test of Arrow Company is better than that of Plume incorporation (Siddiqui, 2006).
Acid test
+
Siddiqui, S. A. (2006). Managerial economics and financial analysis. New Dedhi: New age international
Eugene, F. B & Joel, F. (2009). Fundamentals of financial management. United States: Cengage learning.
Eugene, F. B & Michael, C. (2010). Financial management theory and practice. United States: Cengage learning.
