Question

Using the financial data below calculate the following ratios: 1) Gross Profit Margin; 2) Net Profit Margin; 3) Return on Assets; 4) Days Sales Outstanding; 5) Quick Ratio. For EACH of these five ratios do the following: 1) calculate the value and 2) interpret the value in about one sentence.  TO RECEIVE ANY CREDIT YOU MUST SHOW YOUR WORK, WITHIN THE PROVIDED WORK SPACE. FINAL ANSWERS ONLY WILL NOT CUT IT!   

     Balance Sheet

        ASSETS                                                                                               LIABILITIES                    

Cash: $1,160,000                                                                          Current Liabilities: $173,000

A/R: 335,000                                                                                 Non-current Liabilities: 4,158,000

Prepaid Expenses: 45,000                                                          Total Liabilities: $4,331,000

Inventories: 92,000                                                                       STOCKHOLDERS’ EQUITY

Other Current Assets: 18,000                                                     Common Stock: $20,000

Total current Assets: $1,650,000                                            Additional-Paid-In Capital: 580,000

Fixed Assets: $10,360,000                                                         Retained Earnings: 7,196,000

Patents: 117,000                                                                          Total Stockholders’ Equity: $7,796,000

Total Non-current Assets: $10,477,000                                 Total Liabilities &

Total Assets: $12,127,000                                                         Stockholders’ Equity: $12,172,000

Income Statement Data

Sales: $23,000,000

Cost of Sales: 14,360,000

Gross Margin: $8,640,000

Operating Expenses: $3,750,000

Operating Income: $4,890,000

Non-operating Expenses: 90,000

Net Income: $4,800,000

*outstanding shares are 1,000,000

Answer 1

Gross Profit Margin=Gross Profit/Sales

Gross Profit=$8,640,000

Sales=$23,000,000

Gross Profit Margin=$8,640,000/$23,000,000=37.57%

The gross margin of 37.57% indicates that the company retains 37.57% of it's $23,000,000 sales after deducting the COGS.

Net Profit margin=Net Income/Sales

Net Income=$4,800,000

Sales=$23,000,000

So Net profit Margin=$4,800,000/$23,000,000=20.87%

The net Profit margin of 20.87% indicates that the company manages to retain 20.87% of its revenue of $23,000,000 after deducting COGS ,Operating expenses ,taxes etc

Return on Assets=Net Income/Assets

Net Income=$4,800,000

Assets=$12,172,000

So Return on Assets=$4,800,000/$12,172,000=39.43%

Refers to the income the firm generates using its assets, the firm manages to generate 39.43% of profit using its assets.

Days Sale Outstanding=Receivables /Credit Sale*365

Assuming a 365 day year

Receivables=$335,000

Sales=$23,000,000

$335,000/$23,000,000*365=5.316 days

The receivables remain outstanding for 5.316 days before they are collected.

Quick Ratio = Current Assets-Stock +Prepaid Expenses/current liabilities

Current assets=$1,650,000

Quick Assets=$1,650,000-(92000+45,000)=1,513,000

Current liability=$173,000

Quick Ratio=$1,513,000/$173,000=8.745

Quick ratio of 8.745 indicates the company is healthy and the quick assets are 8.745 times greater than it's current liabilties.