Question

) Statement of the Assignment:

Please prepare a comprehensive list of financial ratios . Write a brief explanation below each financial ratio, e.g. what does the financial ratio measures or what the significance of it is.

For example:

Current Ratio = Current Assist / Current Liabilities

Current ratio measures whether our current assets, if liquidated, are sufficient to pay all of our current liabilities. A CR of 1.5, for example, shows that if we were to liquidate all of our current assets, we will be able to cover 1.5x our current liabilities, whereas a CR of 0.5 shows that liquidating our current assets only covers half of our current liabilities.

THE FOLLOWING RATIONS ARE THE RATIONS I NEED. CAN I PLEASE GET AN ANSWER EACH ONE OF THEM. (EACH BULLET POINT) please explain each ration, its process and how each one of them it is used

• Total debt Ratio=Total assets – total equity / total assets

• Debit equity ratio = total debt / total equity

• Equity multiplier = total assets / total equity

• Long term debt ratio = long term debt / long term + total equity

• Times interest earned ratio = EBIT / Interest

• Cash coverage ratio= EBIT + Depreciation / interest

  Asset management, Or turnover, measures

• Inventory turnover = Cost of goods sold / inventory

• Receivables Turnover = sales / accounts receivable

• NWC turnover= sales / NWC

• Fixed asset turnover = sales/ net fixed assets

• Total asset turnover = sales/ total assets

Profitability measures

• Profit margin = Net income/ sales

• Return on Assets= Net income / total assets

• Return on equity = net income / total equity

Market Value Measures

• EPS = net income/ Shares outstanding

• PE= price per share / earning per share

• Market to book ratio= market value per share / book value per share

• Enterprise value= total market value of the stock + book value of liabilities – cash

• EBITA Ration= enterprise value/ EBITDA

2)

Select one of the financial ratios LISTED. Write the formula for calculating it, and then explain how it is useful in analyzing the financial health of the firm.

How would you use the ratio, how would you assess whether it is at an appropriate level or if it should be improved, and if so, how would you improve it?

Answer 1

Total Debt Ratio (TDR) indicates the total debt relative to the assets of a company. This ratio indicates how the firm has acquired its assets. For example; a TDR of 0.5 would mean that 50% have been acquired through the use of debt and hence the equity ownership over the assets would amount to 50%.  This ratio can be also used to assess if the firm has enough assets tp cover the debt obligations.

Debt Equity Ratio (D/E) is used to evaluate the company's debt relative to its shareholder equity. This ratio indicates a firms solvency and indicates the company's levels of debt as compared to its equity holding. The higher the value of this ratio the riskier the firm is, however this ratio can vary across industries.

Equity Multiplier tells about the ratio of assets owned by the company using its own equity. It is a solvency ratio and explains the amount of leverage present in the firm. An equity multiplier of 4 means that 25%; i.e 1/Equity multiplier of the assets are acquired through equity financing.

Long Term Debt Ratio measures the firm's long term debt as a ratio of its assets. It indicates the ratio of the assets sold to service the long term debt. If this ratio equals 0.8 it means that the company would need to sell 80% of its assets to clear the debt.

Times Interest Earned (TIE) Ratio indicates the ability of a firm to pay of its interest obligation using its operating income.A TIE ratio of 2 indicates that the operating income of the firm is enough to cover twice its interest expense.

Cash coverage Ratio indicates the cash available as a result of the firm's operating activities to pay for the interest expense. It measures the extent to which the firm is generating cash from its  operating activities to pay for its interest expenses.

Inventory Turnover Ratio (ITR) tells the number of times the company is able to sell its inventory over one accounting period. An ITR of 5 indicates that over one accounting period a company sells its enitre inventory five times over. It also means that the company's inventory needs to be replenished every 12/5 = 2.4 months.