Question

You have just been hired as a financial analyst for Oman Helmet Company (OHC), a manufacturer of safety helmets. You have been asked to perform a comprehensive analysis of the company’s financial statements, including comparing OHC”s performance to its major competitors. To begin your assignment you gather the following financial data and ratios that are typical of companies in OHC’s industry: Current ratio 2.3 Acid-test ratio 1.2 Average collection period 30 days Average sale period 60 days Return on assets 9.5% Debt-to-equity ratio 0.65 Times interest earned ratio 5.7 Price-earnings ratio 8

Answer 1

Current ratio 2.3

Current ratio = Current Assets/ Current Liabilities. So a Current ratio of 2.3 means that the current assets of the company will be more than twice enough to settle the current liabilities of the company.

Acid-test ratio 1.2

Acid Test ratio = Quick Assets/ Current Liabilities. So a Acid test ratio of 1.2 means that the quick assets(very liquid assets that can be easily converted to cash) of the company will be more than enough to settle the whole of current liabilities of the company.

Average collection period 30 days

Average collection period = Accounts Receivable / Net Credit Sales. So 30 days means that it takes 30 days for the company to collect its receivables against credit sales.

Average sale period 60 days

Average sale period of 60 days means that it takes 60 days for the company to turn its rawmaterials into final sales.

Return on assets 9.5%

Return on assets = Net Income / Average Assets. Thus the company is making a net income of 9.5% of its assets invested

Debt-to-equity ratio 0.65

Debt equity ratio = Debt / Equity. Thus the company is financed 65% by debts and rest 35% by equity capital.

Times interest earned ratio 5.7

This is basically the interest coverage ratio. This ratio helps to analyze how much of the earning before interest and tax is required to cover interest exepnse. Thus EBIT of the company is enough to cover 5.7 times the interest expense

Price-earnings ratio 8

PE ratio compares the market price per share to earnings per share. A PE ratio of 8 means that, if the stock is purchased at current price, the complete cost can be covered by 8 EPS payments.