Improving Solvency and Net Profit Ratio? (1 Viewer)

[KaraLea]

I need to know how to improve the Solvency of a business if it is 1.33:1
and also suggestions on how to improve a net profit ratio of 7%

 

[veloc1ty]

What is 1.33:1? Which ratio?

I'll help with the NPR though: you should learn how to tackle these problems in a certain way so you can answer anything they ask.

Firstly, what do you do to calculate the NPR?

The calculation is Net Profit/Sales*100 right? To increase that figure by doing simple math you know that the easiest way to do that is by increasing Net Profit.

What affects Net Profit? Net Profit is Sales minus COGS and Expenses. This means to increase Net Profit you need to either increase Sales, decrease COGS, decrease Expenses or do a combination of all three. So you are then given a variety of options to improve the Net Profit Ratio:

- Increasing Sales by doing such things as improving marketing, introducing a new product etc.
- Decreasing COGS by doing such things as using cheaper suppliers, producing/ordering stock from offshore etc.
- Decreasing Expenses by doing such things as improving efficiency, lowering overtime rates, using assets over extended periods etc.

If you followed that well you should be able to apply the same method to the solvency ratio.

 

[KaraLea]

the 1:33:1 ratio is the debt to equity ratio which gives you the solvency of the business so its for every $1 of owners equity there is $1.33 of debt meaning the business is insolvent

i have to suggest ways to improve the solvency

 

[veloc1ty]

That does not mean the business is insolvent. It just means they fund the business with more debt finance than equity finance. Anyway I showed you the method above so you can work it out yourself, that's why I didn't just give you the answers straight away.

To improve the debt to equity ratio you need to either lower debt (liabilities) or increase equity (owner's equity). Work out ways to do that.