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Diapers

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Jamison must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions. Provide clear explanations, not yes or no answers.

a. Why are ratios useful? What three groups use ratio analysis and for what reasons?
Ratios are useful because they help answer questions about a firm that would not be possible using only financial statements. Also, ratios are valuable especially when comparing two different companies, or benchmarking. Ratios standardize the comparison allowing for a more accurate assessment across companies.

The three groups that mainly use ratio analysis are managers, creditors, and stock holders.

Managers use ratio analysis to better understand where the current weaknesses and strengths are in order to create an effective plan to reach the overall goals. Creditors use ratio analysis to measure the financial stability of a company and its short-term solvency. A high current ratio is attractive to potential creditors. Shareholders are interested in the ratio analysis in order to determine the financial standing of a firm. However, they would be suspicious of a high current ratio and prefer that it is lower. A high current ratio might indicate to a shareholder that a company isn’t very profitable.

b. Calculate the 2011 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2009, 2010, and as projected for 2011? We often think of ratios as being useful (1) to managers to help run the business, ( 2) to bankers for credit analysis, and ( 3) to stock-holders for stock valuation. Would these different types of analysts have an equal interest in the liquidity

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