Question

Compute the following ratios for two years. You may use Excel to compute your ratios. (all these formulas should be bases on the company you picked, in this case (Johnson & Johnson) use numbers from balance sheet and income statements found online.

Debt ratio

Gross profit margin

Free cash flow

Times interest earned

Accounts receivable turnover

Inventory turnover

Prepare a DuPont Analysis of ROE for two years, including computations of

Return on Sales

Asset Turnover

Return on Assets

Financial Leverage

Return on Equity

Briefly evaluate the ratio trends. Indicate on your worksheet whether each ratio is:

stronger / weaker

quicker /slower

more / less liquid

more / less risk

Answer 1

1- Debt Ratio = (Short term debt + Long term debt)/ Average Assets (more it is riskier it is)

2- Gross profit margin = (Gross Profit / Net Revenue)*100 (more it is Stronger it is)

3- Free cash flow: (More it is more liquid the company will be)
Free cash flow to the firm = EBIT(1-t) + D&A - Capital expenditure - change in working capital
where EBIT = earning before interest & taxes = operating profit
t = tax rate
D&A = depreciation & ammortisation
capital expenditure = net change in asset (compared with the previous year)
Change in working capital = Current Asset - Current liabilities

Free cash flow to the equity = Net Income + D&A -Capital expenditure - change in working capital + net borrowing

4- Times interest earned = EBIT/Interest expense (more it is more liquid the company will be)

5- Accounts receivable turnover = Net credit sales / Average account receivable (more it is slower it will be)

6- Inventory turnover = Cost of goods sold / Average Inventory (more it is quicker it will be)

7- ROE (Return on equity using DuPont analysis) = Profit margin*Asset turnover*Financial leverage
    = (Net Income/Net Sales)*(Net Sales/Average Assets)*(Average Assets/Average Equity) (more it is stronger it is)

8- Return on Sales = Net Income/Net sales (more it is stronger it is)

9- Asset Turnover= Net Sales/Average Assets (more it is stronger it is)

10- Return on Assets = Net Income/Average Assets (more it is stronger it is)

11- Financial Leverage = Average Assets/Average equity (more it is riskier it is)

12- Return on Equity = Net Income/Average Equity (more it is stronger it is)