## Example Ratio Analysis

Ratios

**Example of Ratio Analysis**

Based on our analysis, is XYZ Company financially "healthy" ?

**Profitabilty Ratios**

Although the profitability ratios have declined somewhat from the prior year, all the profitability ratios still indicate that XYZ is a profitable business. They do need to investigate the 5% decrease in their Gross Margin Percentage.

**Liquidity Ratios**

All the liquidity ratios indicate that XYZ is an excellent position to be able to pay their creditors.

**Activity Ratios**

- Since XYZ's customer's credit terms are net 30 and customers are taking 40 days to pay, the accounts receivable ratios need to be investigated and corrective actions taken.
- While inventory ratios improved slightly, they need to be compared with industry averages to see if any corrective actions might need to be taken.
- Since XYZ's suppliers terms are net 30, the accounts payable ratios indicate that XYZ is promptly paying their suppliers.

**Solvency Ratios**

All of XYZ's solvency ratios indicate that XYZ is financed more by owners than creditors and is in a position to get a loan if needed.