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Acme reported consistent profitability during the past five years. In 2004, income before officers‟
compensation and taxes was $6.5 million ($4.31 + $2.23). For 2008, it increased to $8.7 million
($5.29 + $3.38).
Ratio Analysis
Victoria also prepares Exhibit 16.4, which summarizes financial operating ratios of Acme for the past
five years.
Liquidity ratios show Acme‟s ability to meet current obligations as they come due. The current ratio
decreased from 1.9 to 1.0 during the five-year period. Working capital also decreased from $4.2
million to $190,000 during the same five-year period. These statistics indicate that the firm has a
greater risk in not being able to pay its bills.
Activity ratios reveal how effectively a firm‟s managers are utilizing its assets. The average number
of days in Acme‟s accounts receivable was similar over the past five years, at around 50 days. The
average number of days that inventory remained at the plant before being sold decreased from 58 days
to 47 days. The average number of days of accounts payable was fairly similar over the five-year
period, at around 48 days.
Coverage ratios indicate a firm‟s ability to pay its debt. The number of times interest was earned, as
measured by earnings before interest and taxes (EBIT) divided by interest expense, decreased from 8
to 7 times.
Leverage ratios generally indicate a firm‟s vulnerability to business downturns. Firms with high
leverage have more risk to downturns than those with less debt. Acme‟s debt to tangible worth
increased in the past five years from 1.5 to 1.8. Fixed assets to tangible worth increased from 1.0 to
1.5.
Exhibit 16.4 Acme Manufacturing, Inc.: Ratio analysis, 2004-2008.