Question

TWO PARTS PROBLEM

PART 1)  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 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

  Asset management, Or turnover, measures

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

PART 2)

Select one of the financial ratios LISTED BELOW . 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?

Short-term solvency, or liquidity, measures

• Current ratio = current assets/ current liabilities

• Quick ration = Current assets – inventory / current liabilities

Other liquidity Ratios

• Cash ratio = Cash/ Current Liabilities
• Net Working Capital to Total Assets = Net working Capital / Total Assets
• Interval Measure= Current assets / Average daily operating costs

Long term Solvency Measures

• 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

• Tomes interest earned ratio = EBIT / Interest
• Cash coverage ratio= EBIT + Depreciation / interest

Asser 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

Answer 1

Dear students,

Good evening!!

Here I have given solutions of few ratios if you want to make clear about all then you can asked me at any Time. I will be happy if you ask.

1.Current Ratio:

Current ratio = Current Assets ÷ Current Liabilities

Current ratio measures whether our current assets, if liquidated, are sufficient to pay all of our current liabilities. A CR of 1. for example, shows that if we were to liquidate all of our current assets, we will be able to cover 1 into our current liabilities, whereas a CR of 0.5 shows that liquidating our current assets only covers half of our current liabilities.

2.Quick ratio:

Quick ratio = (Current Assets - Inventory- prepaid expenses) ÷ (Current liabilities- Bank OD)

It shows the short term liquidity position and measures company is able to meet their short term s also knowliquidity. It is also as Acid test ratio & Liquidity ratio too.

3. Profit margin ratio:

Profit margin ratio = Net income ÷ sales

It shows total profit margin on total sales it means if we produced 100 pens and per pen if we get Rs. 5 per pen and selling price is Rs.15 then our net income will become 500 and sales becomes 1500.

So PMR= 500/1500= 0.3333/33.33%

4. Return on assets:

ROA= Net income ÷ Total assets

It is comparison between total Net income and total company's assets. It shows by what amount our total assets will Go up and give returns on assets. Here total of the balance sheet in assets side will become total Assets.

Thank you.