Picasso Company is a wholesale distributor of packaging equipment and supplies. The company鈥檚 sales have averaged about \(900,000 annually for the 3-year period 2015鈥�2017. The firm鈥檚 total assets at the end of 2017 amounted to \)850,000.
The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company鈥檚 operations for the past 3 years. This report will be presented to the board of directors at their next meeting.
In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2015鈥�2017.
| 2015 | 2016 | 2017 |
Current ratio | 1.80 | 1.89 | 1.96 |
Acid-test (quick) ratio | 1.04 | 0.99 | 0.87 |
Accounts receivable turnover | 8.75 | 7.71 | 6.42 |
Inventory turnover | 4.91 | 4.32 | 3.42 |
Debt to assets ratio | 51.0% | 46.0% | 41.0% |
Long-term debt to assets ratio | 31.0% | 27.0% | 24.0% |
Sales to fixed assets (fixed asset turnover) | 1.58 | 1.69 | 1.79 |
Sales as a percent of 2015 sales | 1.00 | 1.03 | 1.07 |
Gross margin percentage | 36.0% | 35.1% | 34.6% |
Net income to sales | 6.9% | 7.0% | 7.2% |
Return on assets | 7.7% | 7.7% | 7.8% |
Return on common stockholders鈥� equity | 13.6% | 13.1% | 12.7% |
In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.
Instructions
b) In terms of the ratios provided, what conclusion(s) can be drawn regarding the company鈥檚 use of financial leverage during the 2015鈥�2017 period?
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