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Financial Ratios: Liquidity, Efficiency, Asset Turnover

Modern Appliances Corporation has reported its financial results for the year ended December 31, 2011.
Modern Appliances Corporation
Income Statement for the Fiscal
Year Ended December 31, 2011
Net sales ............................................................ $5,398,412,000
Cost of goods sold ................................................ 3,432,925,255
Gross profit ......................................................... $1,965,486,745
Selling, general, and administrative expenses ................. 1,036,311,231
Depreciation ....................................................... 299,928,155
Operating income ................................................. $ 629,247,359
Interest expense ................................................... 35,826,000
EBT ................................................................. $ 593,421,359
Income taxes ...................................................... 163,104,554
Net earnings ........................................................ $ 430,316,805


Using the information from the financial statements, complete a comprehensive ratio analysis for
Modern Appliances Corporation.
a. Calculate these liquidity ratios: current and quick ratios.
b. Calculate these efficiency ratios: inventory turnover, accounts receivable turnover, DSO.
c. Calculate these asset turnover ratios: total asset turnover, fixed asset turnover.
d. Calculate these leverage ratios: total debt ratio, debt-to-equity ratio, equity multiplier.
e. Calculate these coverage ratios: times interest earned, cash coverage.
f. Calculate these profitability ratios: gross profit margin, net profit margin, ROA, ROE.
g. Use the DuPont identity, and after calculating the component ratios, compute the ROE for this firm.

Solution Preview

a. current ratio = Current assets/Current liabilities = $2,856,516,992/$1,578,337,233 = 1.81
quick ratio = (Current assets-Inventory)/Current liabilities = ($2,856,516,992-981,870,990)/$1,578,337,233 = 1.19

b. inventory turnover = Cost of goods sold/Inventory = 3,432,925,255/981,870,990 = 3.50
accounts receivable turnover = sales/ccounts receivable = ...

Solution Summary

The solution gives detailed steps on calculating a series of financial ratios from the income statement: liquidity ratios, efficiency ratios, asset turnover ratios, leverage ratios, coverage ratios, profitability ratios, component ratios and ROE. All formula and calculations are shown and explained in steps.

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