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Answer – Financial Ratios

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This is the suggested answer to the Financial Ratios exercise on Colorado Ricardo Mountain Bikes.

Financial ratios: liquidity, profitability, leverage and efficiency

Liquidity: Current Ratio

$1,500,000 / $800,000 = 1.875. Colorado Ricardo has just under two dollars of current assets for every dollar of short-term debt, a reasonably comfortable liquidity position.

Profitability: Net Profit Margin

$200,000 / $4,800,000 = 4.2%. A thin margin that leaves little room for error if sales keep falling.

Leverage: Gearing

$1,200,000 long-term loan / $2,500,000 equity = 48%. Just under half of the business’s equity value is matched by long-term debt – moderate gearing, but it limits how much more Colorado Ricardo could comfortably borrow to fund an e-mountain-bike launch.

Efficiency: Inventory Turnover

$2,800,000 cost of goods sold / $700,000 inventory = 4 times a year, meaning stock is held for roughly three months on average before being sold.

Key point: no single ratio tells the whole story – Colorado Ricardo looks liquid and moderately geared, but its thin profit margin and declining sales are the real warning signs a marketer should flag before recommending further investment.

These ratios draw directly on the figures built up in the Balance Sheet and Profit and Loss Statement exercises.