# Applied Ratio Analysis | Online Assignment Help

his module you are using financial analysis tools to evaluate the financial health of companies. One tool you are learning about is financial ratios and you can use this summary of financial ratios as a guide. You will be combining your findings from this discussion response into your final course project paper in Module 5.

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There are three categories of financial ratios: liquidity, solvency, and profitability.

• Describe what each category tells the user about the financial health of a company.
• Choose three ratios in each category and describe what the ratios tell the user about the company. How are financial ratios used to evaluate a company?
• Discuss what the numbers would be compared against for analysis.
• Calculate each ratio for your companies. What do the ratios tell you about each of your companies?

Be sure to cite any sources using APA style.

Key_Financial_Ratios_Explained_and_Set_up_in_Excel.xls

## Key Ratios – Definitions

 KEY FINANCIAL STATEMENT RATIOS rev. 3-19-2010 rev. Feb 2010 Liquidity ratios Example: A “2.0 to 1” ratio means that there is If current liabilities are rising faster Current Ratio Current Assets 2.0 to 1 \$2.00 of current assets for every \$1 than the current assets from which Current Liabilities in current liabilities, which suggests they must be paid, company could that short-term creditors can be become insolvent (unable to pay reasonably sure of being paid. its debts) and eventually bankrupt. Quick Ratio Quick Assets * 0.9 to 1 Indicates extent to which claims of If Current Ratio is OK, but Quick Ratio “Acid Test” Current Liabilities short-term creditors are covered by is low or declining, the cause may “quick” assets*. be excessive nonliquid inventory. * Quick assets include Cash, Marketable Securities, and Accounts Receivable (excludes Inventory) Asset Management Ratios Number of times per year If the turnover ratio is decreasing Accts Receivable Sales (credit only) 6.0 times receivables were generated or avg number of days to collect is Turnover Accounts receivable and then paid (“turned over”) increasing or is substantially greater than credit terms (e.g. “30 days, net”), Avg Number of 365 (days in year) 60.8 days Number of days customers are then credit and collection policies may Days to Collect A/R turnover ratio taking to pay need to be strengthened. Number of times merchandise Inventory Cost of Goods Sold* 4.0 times items are sold and restocked Turnover Inventory* (“turned over”) per year. If the turnover ratio is decreasing or number of days in Inventory is * Some publications use “Sales” as the numerator, and /or average inventory as denominator increasing , inventory may becoming outdated, and possibly overstated Avg Number of 365 (days in year) 91.3 days Number of days inventory remains Days in Inventory Inv. turnover ratio unsold Debt (Leverage) (Long-term Solvency) Ratios Debt to Total Liabilities 0.50 The portion of the total financing Debt to Assets and Debt to Equity Assets Total Assets supplied by creditors as opposed to are alternative benchmarks that the owner-stockholders. measure long-term solvency. Higher ratios (high leverage) mean greater Debt to Total Liabilities 1.5 The financing supplied by creditors risk that cash flows from operations Equity Total Equity as compared to financing supplied will be insufficient to cover interest by the owner-stockholders. and principal payments. Times interest EBIT* 3.2 Measures the extent to which operat- Low ratio = low margin of safety, Earned Interest expense ing income can decline before firm is and can make it difficult to borrow. unable to meet interest payments * EBIT means “Earnings before Interest and Taxes” Profitability Ratios (not applicable if net loss) Net Profit Net Income 5.1% Net income as a percentage of sales. Low percentage = low safety Margin (%) Sales (net) If trend is down, product costs and/or margin: higher risk that a decline in operating expenses are rising faster sales will erase profits and result than sales. in a net loss. Gross Profit Gross Profit 35.2% Gross Profit as a percentage of sales. A low or declining Gross Profit % on Sales (%) Sales (net) If low or declining, product costs may indicates less ability to sell goods be increasing and/or selling prices at intended selling price, or rising decreasing (steeper discounts). cost of goods, or both. Return Operating Income* 15.3% Measures how well management A low or declining rate could mean on Assets (%) Total Operating Assets is managing assets to generate that assets are not being utilized aka ROI profit from operations. effectively. Return Net Income ** 18.4% Measures rate of return on stockholders Low return could be caused by high on Equity (%) Total Equity ** investment. (However, “dividend yield” debt i.e., high interest expense. for stockholders is generally much less.) * Some publications use Net income (after tax) instead of Operating income (i.e., earnings before interest and income tax, or EBIT) ** If preferred stock exists, subtract Preferred Dividends from Net Income; and also subtract Preferred Stock from Total Equity Market Value Ratios Earnings per Net Income * \$1.23 EPS is the “real” measure of profitability EPS can decline despite an Share (EPS) Common shares outstanding used by potential investors (not used increase in total earnings, and thus by creditors). drive down the market price per * If preferred stock exists, subtract Preferred Dividends from Net Income. share. Price/Earnings Market Price 16.5 times The multiple-times-earnings that High P/E ratio means that investors Ratio (P/E) EPS * investors are willing to pay, based on perceive good growth potential — but their perception of future share price. they could be (and often are) wrong. * If EPS is negative, ratio is “not applicable”

## Key Ratios – Blank

 KEY FINANCIAL STATEMENT RATIOS THIS YEAR LAST YEAR Amounts Answer Amounts Answer Liquidity ratios Current Ratio Current Assets = = Current Liabilities Quick Ratio, or “Acid Test” Quick Assets* = = Current Liabilities * Quick assets include Cash, Marketable Securities, and Accounts Receivable (excludes Inventory) Inventory Cost of Goods Sold Turnover Inventory* Accts Receivable Sales Turnover Accts Receivable* * Textbooks generally use “average” for the year (beginning + ending) / 2, but it’s OK to use ending only Debt (Leverage) (Long-term Solvency) Ratios Debt to Total Liabilities = = Assets Total Assets Debt to Total Liabilities = = Equity Total Equity Times interest EBIT* = = Earned Interest expense * EBIT means “Earnings before Interest and Taxes” Profitability Ratios (not applicable if net loss) Net Profit Net Income = = Margin (%) Sales Gross Profit Gross Profit = = on Sales (%) Sales Return Net Operating Income = = on Assets (%) Total Operating Assets aka ROI Return Net Income = = on Equity (%) Total Equity Market Value Ratios Earnings per Net Income = = Share (EPS) No. shares outstanding Price/Earnings* Market Price = prior year not required Ratio (P/E) EPS * P/E ratio changes daily with market price. If EPS is negative, ratio is “not applicable”. Use “Basic” , not “Diluted”.

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