Two-Rivers Inc. (TRI) manufactures a variety of consumer products. The company's founders have run the company for thirty years and are now interested in retiring. Consequently, they are seeking a purchaser, and a group of investors is looking into the acquisition of TRI. To evaluate its financial stability, TRI was requested to provide its latest financial statements and selected financial ratios. Summary information provided by TRI is presented below. Required: a. Calculate the select financial ratios for the fiscal year Year 2. (use MS word or excel but excel is more recommended)
b. Interpret what each of these financial ratios means in terms of TRI's financial stability and operating efficiency.
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Over the last three years, the current ration of TRI has declined. The declining trend alongside the position that the current ratio is below the industry average meaning it is not a primary concern yet. In spite of that, the current ratio needs to be monitored.
Regarding the acid-test ratio, in the last three years, it has registered an improvement. Despite the increase, it still falls below the industry average. Additionally, an acid-test ratio that falls below 1 shows that TRI might have challenges attaining its short-term obligations.
Over the last three years, TRI’s times earned interest ratio has been improving and falls above the industry average. Above the industry average, it means that the relationship between profits and interest expense is favorable; thus, an indicator that TRI can increase its debts. TRI can consider the increase in its debt, especially if there are prospective investment opportunities.
Regarding the debt to equity ratio, it has had a slight deterioration in year 2, although over the last three years, it has fallen below the industry average. With such debt to equity ratio, it shows that TRI needs to raise additional financing through debt and, at the same time, maintain a below the industry average standard.
Concerning the inventory turnover ratio of TRI, it has been declining and is below the industry average. With such an inventory turnover ratio, it indicates problems with obsolete inventory, overpriced stock, or a decline in operating efficiency.
