Purchase Solution

# Key Financial Ratios that Measure Stability of a Company

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How investors assess the stability of a public company? What are the key financial ratios that measure the stability of an organization? Define stability.

Calculate these ratios per the attached file using Excel spreadsheet. File attached for a analysis of financial ratios for the company.

Balance Sheet as of December 31, 2005

BALANCE SHEET 05

ASSETS
Cash and ST Investments \$11,210 would this be considered income of any sort?
Accounts Receivable \$9,000
Inventories ___\$750_____
Total Current Assets \$20,960
Property, Plant & Equipment \$62,500
less Accumulated Depreciation (\$11,000)
Net Property, Plant and Equipment \$51,500
Prepaid Expenses (Non current) \$1,500
Total \$73,960

LIABILITIES & SHAREHOLDERS EQUITY
Accrued Liabilities (expenses) \$1,750
Interest Payable \$550
Income Taxes Payable \$1,250
Dividends Payable \$500 Is this per share or total dividends?
Total Current Liabilities \$8,150
Long term Debt - A \$10,000
Long term Debt - B \$7,500
Total Liabilities \$25,650
Common Stock at Par \$42,500
Retained Earnings \$6,310 Would this be considered part of income?
Treasury Stock - at cost (\$500) This equals dividends?
Total Shareholders equity \$48,310
Total \$73,960

Key Financial Data for Company

Income Statement of Company
Income for the year ending December 31, 2005

INCOME STATEMENT 05

Net Revenues \$50,000
Total Revenues \$50,000
COGS (not including depreciation) (\$25,000)
Gross Profits \$25,000
SG&A (\$10,000)
Depreciation Expense (\$6,500)
Total Operating Expenses (\$16,500)
Income Before Interest & Taxes \$8,500
Interest Expense (\$1,500)
Income Before Taxes \$7,000
Income Tax Expense (\$2,800)
Net Income \$4,200
Beginning RE \$2,700
Dividends (\$590)
Ending RE \$6,310

##### Solution Summary

Answers to 2 questions are provided:
1) Discussion of key fnancial ratios that measure stability of a Company
2) Calculation of these ratios for a company whose financial statements (balance Sheet and Income Statement) are given.

##### Solution Preview

See attached file
How investors assess the stability of a public company?  What are the key financial ratios that measure the stability of an organization?  Define stability.

Public companies are legally obligated to disclose financial information to shareholders and legislative bodies in the form of an annual report

These annual reports provide:
information on the previous year's activities and performance
plans for the coming years
financial data, graphs, pictures and charts

Investors use these annual reports to assess profitability, survivability, growth, stability, dividends (if any), and the problems, risks and other factors affecting investment.

Investors use the annual reports to calculate ratios like Earnings per share , Price/Earning ratio, Dividend yield , Dividend cover which help in making investment decisions.

Stability is the ability to remain viable in both long-term commitments and working capital sufficiency contexts

FINANCIAL STABILITY RATIOS ­ measure the ability to remain viable in both long-term commitments and working capital sufficiency contexts;

Financial Stability ratios focus on assessing the amount of risk for an entity.They fall into two categories:
? Measures of short term liquidity:
Current Ratio
This liquidity measure indicates ability to meet immediate financial obligations from current assets.

? Measures of financial structure and long term solvency:
Debt to Equity Ratio
It ...

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