what is a good current ratio for a retail company

Category: Cost Accounting Paper Type: Homework Writing Reference: APA Words: 1100
Current ratios describe that how efficiently a company can pay back all short-term liabilities with current assets. Current liabilities are such kind of loans and accounts payable that required to be paid within 1 year while current asset includes all cash, inventory, and accounts receivables (Tulsian, 2002). In accordance with the financial statements of the IKEA group current ratio is calculated through using the current assets and current liabilities of last 3 years (2017, 2016, and 2015) Formula used for the calculation of current ratio is mentioned below:

Year 2017

Year 2016

Year 2015

Current Assets

27,280

28,979

50,012

Current Liabilities

10,220

11,767

11,084

Current Ratio

2.67

2.46

4.51

The current ratio calculated for the company presents that the liquidity condition of the company is well, as during all these three years current ratio was greater than the 1. While ratio greater than 2 also projects possible future issues related to working capital management in the company. While comparative analysis of the three presents that the in 2016 company was showing the best performance in comparison to 2017, and 2015. While the performance of the company in 2017 is relatively same with 2016 performance due to the very minor difference in the current liabilities and current assets of the company in these two years. In 2015 current ratio 4.51 was really high that was not only indicating that company was able to easily meet its current liabilities but also the management of the company was not projecting enough efficiency in managing the working capital of the company (Loughran, 2011).
7.1.2 Fixed Asset Turnover of IKEA Furniture retail company

Fixed asset turnover ratios calculated for 2017, 2016 and 2015 financial performance of the IKEA Company are showing the operational performance of the company in the market. Financial information about the sales and net fixed assets (regarding 2017, 2016 and 2015) are taken from the annual financial reports of the company. Considering that information fixed asset turnover ratios are calculated through the use of mentioned below formula.

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Year 2017

Year 2016

Year 2015

Sales

36,295

35,691

32,658

Net fixed assets

25,660

24,988

25,355

Fixed asset turnover

1.41

1.43

1.29

In accordance with these ratios if we analyze the performance trend of the company during these three years we can say that the company is showing relatively same trend and performance level. In the view of financial experts, higher fixed asset turnover ratio of the company presents the better the condition of the company. While the ratios of IKEA company are between the ranges of 1.2-1.4 that can be considered as highly efficient. However, the operational performance of the company was relatively better in 2016. Moreover, in 2017 and 2015 a clear gap required for improvement is there. While we can say that company is improving with the time as performance ratio in 2017 and 2016 greater than 2015 projects that company is paying attention to its fixed assets use in the operations (Ikea.com, 2016). Fixed assets of the IKEA Company are furniture, equipment, machinery, working plant, and office buildings.
7.1.3 Total Debt Ratio

The total debt ratio is a financial indicator that can elaborate the extent of the IKEA group leverage. Here the formula is provided below that is used for the calculations of the Total debt ratio by using the information as total assets and total equity of the company in 2017, 2016 and 2015.

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Year 2017

Year 2016

Year 2015

Total Assets

52,940

53,967

50,012

Total Equity

39,943

38,907

34,896

Total debt ratio

0.25

0.28

0.30

In accordance with the above presented ratios, it can be concluded that the company is not mainly financing with their assets with debt. In 2015, the total proportion of 0.30%, in 2016 0.28% and in 2017 0.25% were being financed by the long term and short term debts. Thus considering this information we can conclude that the IKEA group is financing their assets and operation through the use of other ways as funds and charity rather than the debt as short-term and long term loans.
7.1.4 Return on Equity (ROE ratio) of IKEA Furniture retail company
The return on equity is also known as ROE, illustrate that what portion of the net income or profit is supported by the total equity of the IKEA group (Ikea.com, 2017). Return on Equity can be calculated by dividing the net income by the total equity (or capital of the company).

Year 2017

Year 2016

Year 2015

Net income

2,473

4,200

3,512

Total equity

39,943

38,907

34,896

Return on equity

0.06

0.11

0.10

Performance trend indicates that in 2016 Return on equity was greater than the return on equity ratio calculated for the year 2017 and 2015, therefore, we can say that in 2016 company was showing better performance in comparison to 2017 and 2015. while we can make interpretations of these ratios as the ratios results as less than 1 but greater than 0 shows that return on equity in these years is higher than 0 but less than 100% as to reach the limit of 100% company should have REO ratio greater than 1. Anyhow, performance trend indicates that IKEA group need to pay more attention to their return on equity to make the operations more profitable for the company.
7.1.5 Price Earnings Ratio (PE ratio) of IKEA Furniture retail company

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Price earnings ratio indicate the ratio between the current price of the share and earning received on the share. The formula that can be used for the calculations of the Price earnings ratio is presented below.

IKEA is a non-profit organization that is not taking investment from selling out their shares in the financial markets. Stichting Ingka Foundation has ownership rights of the IKEA group therefore under their policy they divide the profit generated from the operations and sales of the IKEA group into two parts one goes to the charity organizations and the remaining they reinvest in the operations. As there are no shareholders from the public, therefore, EPS and Price earnings ratios cannot be calculated.

References of IKEA Furniture retail company

Ikea.com. (2016). YEARLY Summary FY16. Retrieved 12 01, 2018, from www.ikea.com: https://www.ikea.com/ms/en_JP/pdf/yearly_summary/IKEA_Group_Yearly_Summary_2016.pdf
Ikea.com. (2017). Yearly Summary FY17. Retrieved 12 01, 2018, from www.ikea.com: https://www.ikea.com/ms/en_JP/pdf/yearly_summary/IKEA_Group_Yearly_Summary_2017.pdf
Loughran, M. (2011). Financial Accounting For Dummies. John Wiley & Sons. Retrieved 12 01, 2018
Tulsian, P. C. (2002). Financial Accounting. Pearson Education India. Retrieved 12 01, 2018

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