Chapter 3, Problem 3.27P

Learning Goal 6

P3-27 Complete ratio analysis, recognizing significant differences Home Health Inc. has come to Jane Ross for a yearly financial checkup. As a first step, Jane has prepared a complete set of ratios for fiscal years 2018 and 2019. She will use them to look for significant changes in the company's situation from one year to the next.

Home Health Inc. Financial Ratios

Ratio	2018	2019
Current ratio	3.25	3.00
Quick ratio	2.50	2.20
Inventory turnover	12.80	10.30
Average collection period	42.6 days	31.4 days
Total asset turnover	1.40	2.00
Debt ratio	0.45	0.62
Times interest earned ratio	4.00	3.85
Gross profit margin	68%	65%
Operating profit margin	14%	16%
Net profit margin	8.3%	8.1%
Return on total assets	11.6%	16.2%
Return on common equity	21.1%	42.6%
Price/earnings ratio	10.7	9.8
Market/book ratio	1.40	1.25

1. a. To focus on the degree of change, calculate the year-to-year proportional change by subtracting the year 2018 ratio from the year 2019 ratio and then dividing the difference by the year 2018 ratio. Multiply the result by 100. Preserve the positive or negative sign. The result is the percentage change in the ratio from 2018 to 2019. Calculate the proportional change for the ratios shown here.
2. b. For any ratio that shows a year-to-year difference of 10% or more, state whether the difference is in the company’s favor or not.
3. c. For the most significant changes (25% or more), look at the other ratios and cite at least one other change that may have contributed to the change in the ratio you are discussing.