Ratio Analysis
| RATIO ANALYSIS | |||||||||||||
| 1) Ratios | 2) Grade | ||||||||||||
| Industry Standards | 2019 | 2020 | 2019 | 2020 | |||||||||
| Liquidity ratios: | |||||||||||||
| Current ratio | 5.00 | 6 | 4 | Good | |||||||||
| Quick ratio | 3.00 | Poor | |||||||||||
| Activity ratios: | |||||||||||||
| Inventory turnover | 2.20 | ||||||||||||
| Days sales outstanding | 90.00 | ||||||||||||
| Fixed asset turnover | 1.00 | ||||||||||||
| Total asset turnover | 0.75 | ||||||||||||
| RATIO FORMULAS | |||||||||||||
| Profitability ratios: | CURRENT RATIO : Current assets / Current liabilities | ||||||||||||
| QUICK RATIO: (Current assets – Inventory) / Current liabilities | |||||||||||||
| Operating profit margin | 20% | ||||||||||||
| Return on equity | 9% | ||||||||||||
| INVENTORY TURNOVER: Annual sales / Average inventory | Since no previous inventory amount was provided in the problem just use the inventory amount for average inventory in the formula | ||||||||||||
| Leverage ratios: | |||||||||||||
| Debt ratio | 0.33 | DAY SALES OUTSTANDING: Account Receivables / Sales per day | -For the Sales per Day you would just use the Sales amount from the income statement. | ||||||||||
| FIXED ASSET TURNOVER: Annual sales / Fixed assets | For the fixed assets you would take the Sales from the Income Statement and divide it by “Net Plant and Equipment” line item in the Balance Sheet. | ||||||||||||
| Coverage ratios: | TOTAL ASSET TURNOVER: Annual sales / Total assets | ||||||||||||
| Times-interest-earned | 7.00 | ||||||||||||
| DATA | |||||||||||||
| Balance Sheet | 2019 | 2020 | OPERATING PROFIT MARGIN: Net income / Sales | ||||||||||
| Assets: | |||||||||||||
| Cash | $200 | $150 | RETURN ON EQUITY: Net income / Equity | ||||||||||
| Account Receivables | 450 | 425 | |||||||||||
| Inventory | 550 | 625 | |||||||||||
| Current assets | 1,200 | 1,200 | |||||||||||
| Plant and equip. | 2,200 | 2,600 | DEBT RATIO: Total Debt / Total assets | -For the Total Debt you would take the “Current Liabilities” line item then add that amount to “Bonds” line item then divide by “Total Assets” line item. | |||||||||
| Less: Acc dep | 1,000 | 1,200 | |||||||||||
| Net plant and equip. | 1,200 | 1,400 | |||||||||||
| Total assets | $2,400 | $2,600 | COVERAGE RATIO: Net Income before taxes / Annual interest expense | ||||||||||
| Liabilities and Owners’ Equity: | 2019 | 2020 | |||||||||||
| Accts/Pay | $200 | $150 | |||||||||||
| Notes Pay-Current | 0 | 150 | |||||||||||
| Current liabilities | 200 | 300 | |||||||||||
| Bonds | 600 | 600 | |||||||||||
| Owners’ equity | – | ||||||||||||
| Common stock | 300 | 300 | |||||||||||
| Paid-in Capital | 600 | 600 | |||||||||||
| Retained earnings | 700 | 800 | |||||||||||
| Total owners’ equity | 1,600 | 1,700 | |||||||||||
| Total liabilities and owners’ equity | |||||||||||||
| owners’ equity | $2,400 | $2,600 | |||||||||||
| Income Statement: | 2019 | 2020 | |||||||||||
| Sales | $1,200 | $1,450 | |||||||||||
| COGS | 700 | 850 | |||||||||||
| Gross profit | 500 | 600 | |||||||||||
| Operating expenses | 30 | 40 | |||||||||||
| Depreciation | 220 | 200 | |||||||||||
| Net operating income | 250 | 360 | |||||||||||
| Interest expense | 50 | 64 | |||||||||||
| Net income before tax | 200 | 296 | |||||||||||
| Taxes (21%) | 42 | 62 | |||||||||||
| Net income | $158 | $234 | |||||||||||
Instructions:
The financial statements and industry standard ratios are listed below for a hypothetical firm. Complete the blue section.
1) Compute the financial ratios for the firm (columns C and D).
2) Compare both 2019 and 2020 ratios to the industry standards (columns E and F). Label “Good” if the firm’s ratio is favorable against the industry ratio. “Poor” if the ratio is unfavorable. See the examples in columns E and F.
3) Give a summary of the company’s financial health. Is the company doing well financially? Why or why not? Use at least 3 data points to support your reasoning.
3) type in your answer here.
