Do the following Ratio analysis and interpret these ratios.

Liquidity Ratios: Current ratio (formula) = current assets/current liabilities expressed as a decimal. The focus of the current ratio analysis is to find out if a company has cash-flow, or not. Source of data for the formula – Balance Sheet. The result is expressed as adecimal.

2. Profitability Ratios: Source of data for the formula; numerator and denominator (A & B) – Income Statement also known as Statement of Operations and/or Profit & Loss Statement.

(a) Gross profit margin (formula) = sales – cost of goods sold/sales. The result isexpressed as a percentage.

(b) Net profit margin (formula) = net profit after taxes/sales. The result isexpressed as a percentage.

(c) Return on equity (formula) = net profit after taxes/shareholders’ equity expressed as percentages. Source of data – Income Statement for the numerator and Balance Sheet for the denominator in the formula. The result is expressed as a percentage.

For the gross profit margin, cost of goods sold (COGS) is for companies that manufacture products, while service firms call it cost of sale, or cost of revenue.

3. Activity/Asset Management Ratios:Source of data for the formula – Balance Sheet for the numerator and Income Statement for the denominator (A & B only).

(a) Days of inventory (formula) = inventory/cost of goods sold plus 365 days. The result is expressed as days. Note: cost of goods sold plus 365 days for the denominator!

(b) Average collection period (formula) = accounts receivable/sales per year plus 365 days. The result is expressed as days. Note: sales per year plus 365 days for the denominator!

(c) Fixed asset turnover (formula) = sales divided by fixed assets.