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August 7, 2022 by admin

Financial ratios

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Financial Ratios:Various financial ratios could be established to create more meaning to the accounting and financial data of a company. Nonetheless, though the application of the financial ratios may be useful, it could also result into information overload. For instance, it has been indicated that a detailed list could ran as many as 44 various financial ratios (Reilly 1989).

Financial ratios can be grouped into 6 different groups focusing on the primary areas that should be analyzed. In this report, we shall only focus on the analysis of the financial ratios will be based on the perspective of the firm investors and they are discussed as follows.

Return on assets (ROA).

It is mostly applied to measure the performance of an organization. N/B the calculations of the ratios are in ($000).

ROA= Net profit/Total assets.

For Ramsay:= 10,714/365,085=0.0293 or 2.93%.

For SONIC= 78,873/313,874=0.0251 or 2.51%

Net profit is income after taxes and interest but prior to dividends. An organization that has more debt pays higher interest (Reilly 1989).

Return on Equity: it calculates the return on the funds of the investors; equity is the sum investment of all firm owners.

ROE= Net profit/Total equity.

For Ramsay= 10,714/172,130+27,385=5.3%

For Sonic= 78,873/167, 287 + 18,892= 4.24%

Return of equity could also be adjusted to show the average sum of equity deployed during the financial year and provides a more detailed picture of how the company faired during the year. The use of ROE simply on the end year numbers could lead to distortion if the sum of equity has in the recent passed been decreased or increased.

Gross profit margin (GPM):

GPM= Gross profit/sales:

For Ramsay= 34,849/381,389 = 9.1%

For Sonic= 27,819/289,783= 9.4%

When a company has a low GPM could result from bad product mix, low prices or the cost of materials are high, or could be a combination of these elements.

The financial Trend Analysis:

The results of trend analysis offers a more credible comparison since, though the data applied in the ratio might have been compiled under a special fiscal accounting alternatives, the internal regularity among each of the trends would allow for positive trend comparisons (Foster 2005).

RAYSAY HEALTH CARE LTD (LIQUIDITY AND PROFITABILITY DATA, 2010-2008):

2010 2009 2008

Margin (net profit/net revenues) 7% 5.6% 7%

Turnover (net revenues/average sum assets 0.63times 0.45 times 0.56 times

ROE (net profit/average equity of shareholder) 7% 4.5% 6.9%

ROA(EBT/average sum assets) 9.1% 6.5% 7.9%

Current assets $22 113 $66 407 54 070

Current liabilities 16 464 18 158 15 022

Working capital $5 649 48 249 39 048

Current ratio 1.34.1 times 3.66.1 times 3.6.1 times

SONIC HEALTH (PROFITABILITY AND LIQUIDITY DATA, 2010-2008):

2010 2009 2008

Net sales 653, 486 326,287 207 638

EBIT (299,207) 11, 529 8,865

Net profit (291,190) 72,298 59,728

Total assets 1,435,562 526,927 782,928

Noncurrent liabilities 252,928 211,319 14,792

Owners equity 944,826 363,018 28,292

The minimal decrease in the Return on equity is fundamentally due to increase in common stock. The impact of the increased in the sum of the shareholders; equity offsets the impact of the increase in income. Generally, a higher ROI indicate greater performance. For sonic the data shows that the firm is performing below the average and as a result, points a need to emphasize of assessments that would result into better performance.

References:

Foster, G. (2005) Financial statement analysis, Prentice-Hall, Englewood Cliffs, New Jersey.

Reilly, K. (1989). Investment Analysis and Portfolio management, second ed. The Dryden Press:

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August 7, 2022 by admin

Financial Ratios

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Week Five Exercise Assignment

Financial Ratios

1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

	Edison		Stagg		Thornton
Cash	$6,000	$5,000		$4,000
Short-term investments	3,000	2,500		2,000
Accounts receivable	2,000	2,500		3,000
Inventory	1,000	2,500		4,000
Prepaid expenses	800	800		800
Accounts payable	200	200		200
Notes payable: short-term	3,100	3,100		3,100
Accrued payables	300	300		300
Long-term liabilities	3,800	3,800		3,800

Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?

2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:

	20X5		20X4
Net credit sales	$832,000	$760,000
Cost of goods sold	530,000	400,000
Cash, Dec. 31	125,000	110,000
Average Accounts receivable	205,000	156,000
Average Inventory	70,000	50,000
Accounts payable, Dec. 31	115,000	108,000
Instructions a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places.

3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The company reported the following information for 20X7:


Net sales	$1,750,000
Interest expense	120,000
Income tax expense	80,000
Preferred dividends	25,000
Net income	130,000
Average assets	1,200,000
Average common stockholders’ equity	500,000

Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
Does the firm have positive or negative financial leverage? Briefly explain.

4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

20X2		20X1
Current Assets	$86,000		$80,000
Property, Plant, and Equipment (net)	99,000		90,000
Intangibles	25,000		50,000
Current Liabilities	40,800		48,000
Long-Term Liabilities	153,000		160,000
Stockholders’ Equity	16,200		12,000
Net Sales	500,000		500,000
Cost of Goods Sold	322,500		350,000
Operating Expenses	93,500		85,000

a. Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.

5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

20X2		20X1
Current Assets	$86,000		$80,000
Property, Plant, and Equipment (net)	99,000		80,000
Intangibles	25,000		50,000
Current Liabilities	40,800		48,000
Long-Term Liabilities	153,000		150,000
Stockholders’ Equity	16,200		12,000
Net Sales	500,000		500,000
Cost of Goods Sold	322,500		350,000
Operating Expenses	93,500		85,000

a. Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.

	6. Ratio computation. The financial statements of the Lone Pine Company follow.

	LONE PINE COMPANY
	Comparative Balance Sheets
	December 31, 20X2 and 20X1 ($000 Omitted)
	20X2				20X1
	Assets
	Current Assets
	Cash and Short-Term Investments	$400				$600
	Accounts Receivable (net)	3,000				2,400
	Inventories	3,000				2,300
	Total Current Assets	$6,400				$5,300
	Property, Plant, and Equipment
	Land	$1,700				$500
	Buildings and Equipment (net)	1,500				1,000
	Total Property, Plant, and Equipment	$3,200				$1,500
	Total Assets	$9,600				$6,800
	Liabilities and Stockholders’ Equity
	Current Liabilities
	Accounts Payable	$2,800				$1,700
	Notes Payable	1,100				1,900
	Total Current Liabilities	$3,900				$3,600
	Long-Term Liabilities
	Bonds Payable	4,100				2,100
	Total Liabilities	$8,000				$5,700
	Stockholders’ Equity
	Common Stock			$200		$200
	Retained Earnings			1,400		900
	Total Stockholders’ Equity			$1,600		$1,100
Total Liabilities and Stockholders’ Equity				$9,600		$6,800


	LONE PINE COMPANY
	Statement of Income and Retained Earnings
	For the Year Ending December 31,20X2 ($000 Omitted)
	Net Sales*				$36,000
	Less: Cost of Goods Sold		$20,000
	Selling Expense		6,000
	Administrative Expense		4,000
	Interest Expense		400
	Income Tax Expense		2,000		32,400
	Net Income				$3,600
	Retained Earnings, Jan. 1				900
	Ending Retained Earnings				$4,500
	Cash Dividends Declared and Paid				3,100
	Retained Earnings, Dec. 31				$1,400
	*All sales are on account.

Instructions

Compute the following items for Lone Pine Company for 20X2, rounding all calculations to two decimal places when necessary:

a. Quick ratio

b. Current ratio

c. Inventory-turnover ratio

d. Accounts-receivable-turnover ratio

e. Return-on-assets ratio

f. Net-profit-margin ratio

g. Return-on-common-stockholders’ equity

h. Debt-to-total assets

i. Number of times that interest is earned