Explore BrainMass

# Financial Ratios

It is hard to get a good sense of the financial performance of a firm based on a quick glance of the firmâ€™s balance sheet, income statement, or cash flow statement. As a result, we often calculate financial ratios that help us communicate information about the financial performance of the firm. By using financial ratios, we get a better understanding of what values on the financial statements are actually telling us, if they are good or bad, and where they may need to be improved.

1. Solvency Ratios

Solvency ratios look at whether or not the firm can meet its current obligations as they become due. The most widely used measure of liquidity are the current ratio and the quick ratio.

2. Activity Ratios

Activity ratios look at how effectively the firmâ€™s assets are being managed. Firms invest in a number of short-term and long-term assets, and these investments depend on a number of different factors. It may be important to know how firm manages its investments in accounts receivables (so that it can set appropriate credit policy) and inventory (so that it can set appropriate inventory management policy).  The most common activity ratios are total asset turnover ratio, receivables turnover ratio, and inventory turnover ratio.

3. Profitability Ratios

The size of the firm is very important when analyzing the firmâ€™s profitability. Imagine two companies that both make \$100,000/year. One would cost you \$100,000 to buy, one would cost you \$1,000,000 to buy â€“ which would you prefer? The answer is obviously the first. Typically we calculate a firmâ€™s profit margin, then look at ratios such as return on assets (which gives us a sense of the total value of the firm), and return on equity (which gives us a sense of the return to shareholders). We can also calculate the payout ratio (how much of the firms income it pays out in dividends) and the retention ratio (how much of the firmâ€™s net income it keeps as retained earnings to reinvest each year).

5. Market Value Ratios

Until now, weâ€™ve looked at ratios that are calculated using accounting numbers. However, accounting values are not adjusted for things such as risk and interest rates. As a result, the market value of the firm may differ substantially from its book value. Market value ratios are important because the market value should reflect the true value of the firm. Common market value ratios include the price-to-earnings (P/E) ratio, dividend yield, and the market-to-book (M/B) value or Tobinâ€™s Q ratio

## BrainMass Categories within Financial Ratios

### Current Ratio

Solutions: 38

The current ratio provides information about the solvency of a firm. It is equal to the current assets divided by the firms current liabilities.

### Quick Ratio

Solutions: 0

The quick ratio provides information about the solvency of a firm. It is equal to the quick assets divided by the current liabilities.

### Asset Turnover

Solutions: 12

Asset turnover is an activity ratio that provides information about how effectively management is using the firm's assets to generate sales. Asset turnover is equal to sales divided by average total assets.

### Receivables Turnover

Solutions: 2

Receivables turnover is an activity ratio that provides information about the effectiveness of the firm's credit policy. It is equal to sales divided by average accounts receivable.

### Inventory Turnover

Solutions: 0

Inventory turnover is an activity ratio that provides information about the life span of the firm's inventory. It is equal to the cost of goods sold divided by average inventory.

### Debt Ratio

Solutions: 107

The debt ratio, debt-to-equity ratio and equity multiplier provide information about the capital structure of the firm.

### Interest Coverage

Solutions: 0

The interest coverage ratio provides us information about how well a firm is able to generate earnings to cover its interest expense. It is equal to EBIT divided by interest expense.

### Profit Margin

Solutions: 60

A firm's profit margin provides information about how much profit the firm will keep for every dollar of sales it makes.

### Return on Assets (ROA)

Solutions: 36

The return on assets shows us how effectively management is using the firm's assets to generate earnings. It is a function of asset turnover and profit margin.

### Return on Equity (ROE)

Solutions: 157

The return on equity shows us how effectively management is using the firm's assets to generate earnings for shareholders, adjusting for leverage. It is a function of asset turnover, profit margin and the equity multiplier.

### Payout, Retention and Growth Ratios

Solutions: 1

The payout ratio is the proportion of net income the firm pays out as dividends. Conversely, the retention ratio is the proportion of net income the firm keeps to reinvest. The growth rate is a function of the retention ratio and the expected return on retained earnings.

### Price-to-Earnings (P/E) Ratio

Solutions: 77

The P/E ratio provides information about what price the stock is trading at in proportion to its earnings. It is equal to the price per share divided by earnings per share.

### Dividend Yield

Solutions: 104

The dividend yield provides information about how much dividends a firm pays in proportion to the price its stock is trading at. It is equal to the annual dividend per share divided by the market price per share.

### Market-to-Book Value and Tobin's Q

Solutions: 0

The market-to-book value and Tobin's Q look at how the value of the firm relates to its historical cost of equity and the replacement value of its assets.

### Walgreens ratios 2010 and 2009; Robinson Inventory turnover

Compute the financial ratios using the 2010 and 2009 data. Inventories for Robinson Company are \$500,000 for 2014 and \$350,000 for 2013. Suppose the Robinson Company had a cost of goods sold of \$1,000,000 in 2013 and \$1,200,000 in 2014. a. Calculate the inventory turnover for each year. Comment on your findings. b. What wo

### Ajax Electronics - Case Analysis

Ajax Electronics Marc H Meyer and James Molloy Entrepreneurship and Small Business Management Northeastern University 212 Hayden Hall 360 Huntington Avenue, Boston, MA 02115 Tel: 617-373-5948; Email: [email protected] March 2002 In midsummer 2002, J

### Liquidity Ratios, Profitability Ratios, Asset Management Ratio

Using the Income Statement and Balance Sheet attached calculate the following 10 ratios. 1. Current Ratio 2. Quick Ratio 3. Accounts Receivable Turnover 4. Average collection period 5. Inventory Turnover 6. Debt to total assets 7. Debt to stockholders' equity 8. Times interest earned 9. Gross profit rate 10.

### Retain the shares as investment or dispose them off.

Mr. Leftright has 500 shares in Sigma Limited. He observed a fall in the dividend of the company. He is confused. Advice him through a proper analysis of the financial statement, whether he should retain the shares as investment or dispose them off. The following are the income statement and the balance sheet of the company. I

### Financial Statement Analysis - Current Ratio

Attached are the financial statements for one company for the years 2013 and 2014. Use the statements to calculate the following: 1. Calculate the current ratio at year-end 2014. 2. Calculate the days in inventory ratio for 2014. 3. Calculate the inventory turnover for 2014. 4. Calculate the Accounts Receivable Turnover for

### Green Valeey Nursing Home, Inc.: Financial Condition Analysis

Financial Condition Analysis Questions: 17.1 a. Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve (i.e., increase) this ratio? - Use cash to pay off current liabilities. - Collect some of the current accounts receivable. - Use cash to pay off some long-term debt. - Purc

### Computation of Ratios and Missing Information

Dear Expert Attached is Doc. 201- Return on Equity = ROE =25% Net Profit Margin = NPM=5% Total Asset Turnover = TAT=2 Inventory = \$4,000 Accounts Receivables = \$2,500 Sales = \$50,000, Current Liabilities = \$5,000 Net Working Capital = NWC = \$2,000 All sales are on credit. Assume no prepaid expenses. Assume 365 days

### EPS/EBIT Analysis in the Context of Strategic Implementation

Describe the considerations of EPS/EBIT analysis in the context of strategic implementation. Use APA format.

### Coca Cola Ratio Analysis

Obtain 3 consecutive years of income statements and balance sheets from Coca Cola. Calculate the following ratios for 3 years: Gross Profit Margin, Operating Profit Margin, Profit Margin After Taxes, Current Ratio, Acid Test or Quick Ratio, Average Collection Period (or Days Sales Outstanding), Debt Ratio and Return on As

### Financial Performance Measurements

Explain operating leverage, ROI, EVA on financial statements, specifically for Apple

### Payback Option with the Highest Return

Bill Martin made an investment several years ago, and he now has an option as to how it will take the return on that investment. Option 1 is to receive an immediate cash payment of \$100,000. Option 2 is to receive a payment of \$10,000 per year for the next 10 years and then to receive a final payment of \$100,000 in the eleventh

### Calculating Rate of Return on Equity

Swamp & Sand's current dividend is \$1.6 per share. Analysts expect the firm's growth rate of 2% per year to continue indefinitely. The current stock price is 12.5 . Calculate the required return on equity for this firm.

### General Mills & Meiji Holdings: Financial Statement Analysis, Statement Review

Review the financial statements of General Mills and Meiji Holdings Co., Ltd. List items in the equity section. Are there preferred shares? Any treasury stock? List basic and diluted EPS Any discontinued operations? Any stock compensation plans? What method to value stock? Stock compensation expense reported? Compu

### Financial statements

What information do financial statements provide? What are the advantages and disadvantages of the different forms of business? Topic A Look at the four basic financial statements for any publicly traded corporation. You can find them at the SEC website using their search tool here: http://sec.gov/edgar/searchedgar/companys

### Indifference point: variable rent or fixed rent 5 year lease restaurant

Assume you have a restaurant in operation and the property owner has offered a 5-year lease rental of \$42,000 per year or a variable lease rental of 10% of your sales revenue. Your current sales revenue in the new year is projected to be 505,000. Find the indifference point (the break even point of sales revenue at which the f

### Calculation and Microsoft Excel Charts of Financial Ratios

Consider the attached LuluLemon Case Study and Compute the following ratios: a. Profitability Ratios -Gross profit margin -Operating profit margin -Net profit margin -Return on total Assets -Return on stockholder's equity b. Liquidity Ratios -Current ratio -Working capital c. Leverage Ratios -Debt to asse

### Sonita Manu: Breakeven, Target Profit, Margin of Safety

Sonita Manufacturing per unit Sales RM25.00 DM RM10.50 DL RM5.00 VOH RM3.00 variable selling RM1.30 total var cost RM19.80 Fixed costs (annual) MOH RM192,000.00 S&A RM276,000.00 RM468,000.00 sales volume 120,000 Calculate breakeven in units and sales, margin of safety in units, units to reach target

### CVP Analysis

1. CVP Analysis with Semi-fixed Costs Melissa Mooring, director and owner of the Kids Education Center, has a master's degree in elementary education. In the seven years she has been running the Kids Education Center, her salary has ranged from nothing to \$20,000 per year. "The second year," she says, "I made 62 cents an hour.

### External Financing Needs and Measures of Return on Investment

1- Describe how organizations determine the need for external financing. 2- Critically discuss each of the following methods for measuring return on investment: payback period, average rate of return, net present value, and internal rate of return.

### NPV

Otobai Company in Osaka, Japan is considering the introduction of an electrically powered motor scooter for city use. The scooter project requires an initial investment of Â¥17.0 billion. The cost of capital was assumed to be 10%. The initial investment can be depreciated on a straight-line basis over the 10-year period, and pro

### Valuing Securities Accounting - Financial Statement Analysis

I need help with evaluating the financial statements for Athena Health. Attached please find their financial statements for the year ending 2013. Specifically, I need help with financial ratio analysis (total margin, operating margin, ROA, ROE, p/e, fixed asset turnover etc...), operating indicator analysis, DuPont, and EV

### Cost Behavior and Break-even Analyses

Question 6 a. The following selected data were taken from the accounting records of Shaking Industrial Manufacturing: July's costs consist of machine supplies (RM170,000), rent (RM24,000), and plant maintenance (RM1,080,000). These costs exhibit the following respective behaviour: variable, fixed, and semi-variable. Req

### Accounting: Throughput Accounting

Hello, The enclosed homework is from a finance module and it is focused on the relevant costs that should be considered for decision making within organizations. We have to use the breakeven point (BEP) formula BEP = FC/(P/unit-VC/Unit) t = (FC+Target Profit)/(Price/Unit - VC/Unit) Also we will need to calculate in

### Income Statements and Profitability Ratios

In this assignment, you will use this information to create an income statement and then analyze it for profitability. Selected accounts for Jackson, Inc. are listed below along with their balances before closing the year of 12/31/12. Jackson, Inc. is a firm that manufactures wireless mouse systems for laptops. Use this informa

Please discuss if this is the standard business lay out. I was hoping to get a little more detail on each section.

### Ratios

Keefer, Inc. began business on January 1, 2010. Information on its inventory purchases and sales during 2010 and 2011 follow: Inventory Purchases__________________ Date Units Cost per Unit Total January 1, 2010 85 \$25 \$ 2,125

### Accounting: Break-Even Analysis

Please complete in Excel. The Circumstance The president of your company is grateful for your quick reference guide on costs. Now she has a different request. As she sets the company direction she needs help refining sales and production targets for next year. She has gathered the following information: The company,