This is the suggested answer to the Financial Ratios exercise on Colorado Ricardo Mountain Bikes.
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.
These ratios draw directly on the figures built up in the Balance Sheet and Profit and Loss Statement exercises.
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