Based on the following information from ABC Company's financial analysis, which one of the following statements is NOT true? Ratio year1 year2 year3 year4 year5
Debt to equi 0.05 0.05 0.01 0.01 0.01
Net profit ratio 15.9% 18.6% 17.5% 19.6% 21.3%
payable turnover ratio 9.75 10.63 11.24 13,15 13.52
Inventory turnover ratio 6.31 5.76 7.28 10.53 15.36
Gross profit ratio 58.3% 52.3% 46.9% 49.5% 41.3%
Net profit ratio 13.2% 15.2% 14.1% 15.9% 16.4%
Current ratio 7.35 4.96 3.28 2.65 3.14
A. The cost of goods sold has been increasing over the five years.
B. The company has very little debt and maybe underleveraged
C. The company's ability to cover its short-term obligations is getting higher over the five years.
D. The company is selling their inventory faster over the five years.

Based on the financial analysis given above, an untrue statement would be that C. The company's ability to cover its short-term obligations is getting higher over the five years.

A company's ability to cover its short term obligations is shown by the Current ratio.

A higher current ratio means that a company can use its short term assets to cover its short term obligations.

ABC Company's current ratio decreased consecutively for 4 years which means that their ability to cover short term obligations got lower.

In conclusion, option C is correct.

Find out more about current ratio at link.

ABC Company

Financial Analysis:

A. The cost of goods sold has been increasing over the five years.

Explanation:

The gross profit ratio was 58.3% in year 1 and continued a downward spiral to 41.3% in year 5.  This depicted an underlying fact that the cost of goods sold had been increasing over the years.  The cost of goods sold influences the gross profit, and with the sales value remaining stable over the years, the ability of the company to generate enough profit out of its sales had been impaired greatly.  Fortunately, for ABC Company, the increasing cost of goods sold did not increase alongside the fixed costs of running the business.  This resulted to an increasing net profit ratio over the same period.

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