We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Financial Ratios Essay Sample

essay
The whole doc is available only for registered users OPEN DOC

A limited time offer!

Get a custom sample essay written according to your requirements urgent 3h delivery guaranteed

Order Now

Financial Ratios Essay Sample

• Prepare a ratio analysis for the fiscal year ended Dec 31, 2012. Organize your analysis per the following outline:

(1) Liquidity
– Current ratio: current assets/ current liabilities= 25,000/17,000 = 1.47%
– Quick ratio: current assets-inventory/ current liabilities= 25,000-17,000 / 17,000 = .25 (note: 17,000 cancels itself out)
Comments on liquidity: Cannot tell if these ratios are good or bad without more information on the company’s situation or past years.

(2) Asset management
– Total Asset turnover: sales/ total assets= 10,000/40,000= .25
– Average collection period (ACP): A/R/ average credit sales per day= 3,000/ (10,000/365) = 3,000/ 27 = 111 days
Comments on asset management: Joe’s Is producing $0.25 for each $1 of assets. This cannot be further explained without more information. Joe’s customers take over 111 days to pay their bills.

(3) Debt management
– Debt ratio: total liabilities/ total assets= 20,000/ 40,000= .5 or 50%
– Times interest earned: earnings before interest and taxes(EBIT)/ interest ex.= 3,000/200 = 15

Comments on debt management: Joes is not in large debt because it is not equal to their total liabilities as long as they keep their accounts payable low and do not borrow more money than their assets can outweigh, this includes their long term debt. Joes EBIT could drop 2,800 and they could still make interest payments. Joe’s ratio of 15 means the income is 15 times greater than the annual interest expense.

(4) Profitability
– Net profit margin: Net income/sales= 1,800/10,000= 18%
– Return on Assets (ROA)= Net income/ total assets= 1,800/40,000=.045 or 4.5%
– Return on Equity (ROE)= Net income/ total equity=1,800/20,000= .09 or 9%
– Extended Du Pont equation=
ROE= Net income/sales x Sales/total assets x Total Assets/total (common) equity = .09 = .18 x .25 x 2.0

Comments on profitability to include your comments on the sources of ROE
revealed by the Du Pont equation: The net profit margin shows 18% or $0.18 or each dollar of sales remains after all expenses are paid. Joe’s earns $0.045 or 4.5% for every $1 of assets to generate earnings. ROE is 9% of profit Joes generated with the money shareholders have invested. Du Pont equation: Net profit margin at 18% accounts for a small amount of the ROE. Asset turnover is $0.25 for each dollar of asset generating earnings which is not affecting ROE greatly. The Equity multiplier is the leverage effect in ROE at 2.0. Without the leverage effect ROE would be .045, however, Joe’s currently does not use a lot of debt financing which is why the ROE is already low for the firm’s equity. Overall Joe’s is doing well by not using other people’s money.

(5) Market value ratios
– PE ratio: Stock price/ EPS = $50.00/ 1.80 = $27.77
– Market to book ratio: Stock price/ book value per share= $50/$7=$7.14 Comments on the market value ratios: Without past ratios or other market ratios, Joe’s PE tells us there is a medium expectation for growth of the company and the M/B ratio shows there are intangible assets the firm is not listing.

We can write a custom essay

According to Your Specific Requirements

Order an essay
Get Access To The Full Essay
icon
300+
Materials Daily
icon
100,000+ Subjects
2000+ Topics
icon
Free Plagiarism
Checker
icon
All Materials
are Cataloged Well

Sorry, but copying text is forbidden on this website. If you need this or any other sample, we can send it to you via email.

By clicking "SEND", you agree to our terms of service and privacy policy. We'll occasionally send you account related and promo emails.
Sorry, but only registered users have full access

How about getting this access
immediately?

Become a member

Your Answer Is Very Helpful For Us
Thank You A Lot!

logo

Emma Taylor

online

Hi there!
Would you like to get such a paper?
How about getting a customized one?

Can't find What you were Looking for?

Get access to our huge, continuously updated knowledge base

The next update will be in:
14 : 59 : 59
Become a Member