We need to thoroughly review Wizard Industries' accounting records and industry ratios before
determining whether to offer them credit. Let's take a closer look at the review, step by step:
Profit margin - Over the past three years, Wizard Companies' revenue margin has grown,
indicating a potential increase in the company's profitability.
Receivables Turnover: There has been a slight decrease in receivables turnover, from 4.3x
to 4.3x. It suggests that receivables are taking a little longer to be collected, even if there
is still a healthy turnover.
Average collection duration: The average collection duration has increased dramatically
from 58.3 days to 1.7%. There may be a credit risk because Wizard Industries has
requested more money to be paid on its accounts.
Inventory Turnover: From 1.6 to 1.1, there has been a drop in inventory turnover. A
lower stock turnover rate can indicate that they have more inventory than they need,
which could be dangerous.
Capital Asset Turnover: The capital asset turnover ratio, which shows that assets have
been employed effectively, remains constant at 4.3x.
Current Ratio: From 1.6 to 1.1, the current rate has dropped. A current ratio below one
should raise red flags because it may mean Wizard Industries won't be able to pay its bills
Although it is not provided, the quick ratio is an essential measure of short-term liquidity.
Should the value be lower than 1.0, an issue would arise.
Debt-to-Total-Assets Ratio: The increase in debt from 60% to 100% of total assets
indicates a higher leverage ratio. This could become an issue if it keeps rising.
Return on Investment or ROI -
With an average return on assets (ROA) of 20.3%, the
return on assets is excellent.
Return on Equity (ROE): At 6.3x, the ROE suggests that shareholders are receiving a