Importance of Ratio Analysis Analysis of Financial Statements Analysis of Operational Efficiency of the Firms Helps in Identifying the Business Risks of the Firm For Planning and Future Forecasting of the Firm irt-Bum Ratio Analysis Liquidity Solvency Activity Profitability Ratios Ratios Ratios Ratios They These ratios These ratios measure the show the They reflect measure firm's ability proportion of the firm's overall debt and efficiency in to meet utilizing the performance current equity in & financing the assets. obligations. effectiveness firm's assets. of the firm.SUMMARY OF RATIO ANALYSES Type of Formula Values in Php Ratio Analysis Ratio 20AA 20BB A. Liquidity Ratio 1. Current ratio Current Assets 100,000/39250 2.55:1 Firm's ability to meet Current Liabilities 94,500/45,000 2.10:1 short-term obligations Quick Assets 45,000/39250 1.15:1 Firm's ability to meet Current Liabilities 43200/45000 .96:1 sudden and immediate demands on current assets. Quick assets = cash, marketable securities, accounts receivable, netType of Formula Values in Php Ratio Analysis Ratio 20AA 20BB B. Activity Ratio 1. Inventory Sales 300,000/25,000 12 times Number of times turnover Average Inventory 200,000/25,000 8 times the merchandise inventory was sold and replenished during the period 2. Days of Number of days in a 365/12 30.22 days Number of days sales in period/Inventory 365/8 45.63 days inventory is sold, inventory turnover from date acquired 3. Accounts Net sales 200,000/20,000 10 times Number of times receivable Average receivables receivables have turnover been realized in sales 4. Average Number of days in 360/10 36 days Average number of collection year/Receivable days it takes to period turnover collect receivablesType of Formula Values in Php Ratio Analysis Ratio 20AA 20BB 5. Asset turnover a. Fixed Net sales 200,000/67,500 2.96 How effectively fixed asset Average fixed assets assets have been turnover utilized to generate sales revenue b. Total Net sales 200,000/187,250 1.07 Ability of the firm assets Average total assets generating revenues; turnover a measure of investment efficiency C. Leverage Ratios 1. Equity to Owner's Equity 100,750/99,250 1.02 |Shows the debt ratio Total Liabilities 79,500/95,000 .84 relationship between investors contributions and debt of the firmType of Formula Values in Php Ratio Analysis Ratio 20AA 20BB 2. Debt ratio Total liabilities 99,250/200,000 50 Proportion of assets Total assets 95,000/174,500 .54 |provided by creditors D. Profitability Ratios 1. Gross profit Gross Profit 180,000/300,000 60% | Gross profit margin Sales 100,000/200,000 50% percentage on sales to recover operating expenses 2. Operating Earnings (before 55,000/300,000 18 Operating profit profit margin interest and taxes) / 40,000/200,000 20 percentage per peso Sales of sales 3. Net profit Net profit (earnings 35,750/300,000 .12 Profit percentage margin after interest and 26,000/200,000 .13 per peso of sales taxes) / SalesType of Formula Values in Php Ratio Analysis Ratio 20AA 20BB 4. Return on Net profit (earning after 26,000/187,250 14% Overall assets assets interest and taxes) / productivity average total assets 5. Return on Net Profit 26,000/90,125 29% Rate of net income equity Average owner's equity earned based on owner's equityNACM ALRES National Association of Credit Management Comprehensive Case (42 points) OG Corporation's balance sheet and income statement is listed below. Balance Sheet This Year Last Year Cash 50,000 40,000 Accounts receivable 80,000 60,000 Inventories 180,000 110,000 Plant & equipment 300,000 260,000 Less accumulated depreciation -40,000 20,000 Total assets 570,000 450,000 Accounts payable 100,000 150,000 Accrued liabilities 70,000 50,000 Mortgage payable 80,000 Common stock 130,000 90,000 Retained earnings 190,000 160,000 Total liabilities and equity 570,000 450,000INCOME STATEMENT THIS YEAR LAST YEAR Net Sales 680,000 600,000 Cost of goods sold 410,000 330,000 Gross profit 270,000 270,000 Operating expenses 190.000 192,000 Operating income 80.000 78,000 Interest expense 7,000 2,000 Profit before taxes 73,000 76,000 Taxes 22,000 22,800 Net income 51,000 53,200 Other data: Cash dividends paid this year were $21,000. The change in accumulated depreciation account is the depreciation for the year. (02013 NACM 9