Making Sense of Financial Health: Luxury Loft 2017 Ratios Analysis
What are the key ratios calculated for Luxury Loft in 2017?
1) current ratio 2) debt to total assets ratio 3) return on ordinary shareholders' equity ratio 4) assets turnover ratio 5) return on assets ratio
How can these ratios help in evaluating the company's financial health?
Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational efficiency, and profitability by studying its financial statements such as the balance sheet and income statement. It is a cornerstone of fundamental equity analysis.
Calculation of Ratios for Luxury Loft 2017:
(a) Calculation of ratios for Luxury Loft in 2017:
1. Current Ratio: It measures the company's ability to pay off its current obligations using its current assets.
Formula: Current Ratio = Current Assets / Current Liabilities
Current Ratio for Luxury Loft in 2017 = 2:1
2. Debt to Total Assets Ratio: It measures the percentage of total assets financed by debt.
Formula: Debt to Total Assets Ratio = Total Debt / Total Assets
Debt to Total Assets Ratio for Luxury Loft in 2017 = 44.44%
3. Return on Ordinary Shareholders' Equity Ratio: It measures the return earned on ordinary shareholders' equity.
Formula: Return on Ordinary Shareholders' Equity Ratio = Net Income / Ordinary Shareholders' Equity
Return on Ordinary Shareholders' Equity Ratio for Luxury Loft in 2017 = 15%
4. Asset Turnover Ratio: It measures the efficiency of a company in using its assets to generate revenue.
Formula: Asset Turnover Ratio = Net Sales / Total Assets
Asset Turnover Ratio for Luxury Loft in 2017 = 1.48
5. Return on Assets Ratio: It measures the return earned on the total assets of a company.
Formula: Return on Assets Ratio = Net Income / Total Assets
Return on Assets Ratio for Luxury Loft in 2017 = 8.33%
(b) Comment on the liquidity, solvency, and profitability of Luxury Loft:
Liquidity: The company has sufficient current assets to pay off current liabilities.
Solvency: 44.44% of total assets are financed by debt.
Profitability: The company generated a return of 15% on ordinary shareholders' equity, with an asset turnover ratio of 1.48 and a return on assets of 8.33%.