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Ratios and Balance Sheets

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I am having problems with some examples on Ratios and Balance Sheets.

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The expert calculates the debt ratio.

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Please see the attached file.

1. Calculate the current ratio.
From the balance sheet:
Current Ratio = (Current assets) / (Current liabilities)
= 1,070/745
= 1.436
This ratio indicates the working capital strength of the firm for investors. Since it is greater then 1, this means that the firm has enough liquidity.

2. Calculate the debt ratio.

Debt Ratio= (Total Debt)/ (Total Assets)
= 1,145/2,270
= 0.504

This ratio measures the total debt level of a business. Since the value is less then 1.0, this indicates that the firm has positive net worth.

3. Calculate profit margin on sales
Profit margin= net income/sales
= 84/2,400
= 0.035

4. Return on total assets.
Return on Assets (ROA) = (Earnings after taxes)/ (Total assets)
= (175-56)/ 2,270
= 0.052

5. Calculate the Inventory ratio.
Inventory turnover = (cost of goods sold)/ (average inventory)
= 1,834/ 625
=3

6. Calculate the price earnings ratio.
Price earnings ratio = Market Price / Earnings per Share
= 40/8.40
= 4.761

Determine the following:
7. If assets are $7,000 and capital is $2,000, what are liabilities?

Total assets = Total liabilities + capital
7,000 = Total liabilities + 2,000

Total liabilities = 7,000-2,000
Total liabilities = $5,000

(P.S: The formula can also be written as Assets= Liabilities+Owners' equity)

8. If capital is $17,000 and liabilities are $8,000, what are assets?

Total assets ...

Solution provided by:
Umut Oltulu, MBA
Education
  • BSc, Dokuz Eylul University
  • MBA, Texas A&M University-Kingsville
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