The Following Information Is Based on the Financial Statements of Oscar

question 66

Essay

The following information is based on the financial statements of Oscar Distributing Ltd., which has a December 31 year end: Return on equity, 2020 ........................................... 8.1 %
Return on equity, 2021 ........................................... 8.4 %
Profit margin, 2020 ................................................ 10.1 %
Profit margin, 2021 ................................................ 10.3 %
Debt to assets ratio, 2020 ....................................... 3:5
Debt to assets ratio, 2021 ....................................... 1:2
Current ratio, 2020. ................................................ 1.8:1
Current ratio, 2021. ................................................ 2: 1 Other events that recently occurred at Oscar's:
-Five out of six members of the board of directors resigned. Four of these individuals have launched a lawsuit on behalf of shareholders in an attempt to terminate the employment of senior management.
-In February 2022, a major spill from Oscar's heating fuel tanks damaged the fruit trees of a commercial orchard next door to Oscar's warehouse.
Instructions
Using the information about Oscar Distributing Ltd., explain how use of ratio analysis alone may not lead to the optimum investment decision.

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Definitions:

Accounts Receivable Turnover

A financial ratio indicating how efficiently a company collects cash from credit sales by measuring the number of times receivables are collected over a period.

Inventory Turnover

An index that reveals the number of times a business's stock is sold and restocked during a specific period, showcasing how efficiently inventory is managed.

Total Current Assets

Assets of a company that are expected to be used or converted to cash within one year.

Debt/Equity Ratio

Determination of a firm's borrowing dependency, achieved by dividing its liabilities by its shareholder's equity.