Question

Select the 10 ratios you deem most important financial ratios for a 3-year period. Based on your analysis of your ratios

Can you identify the major cash flow implications for this company?

Ratios	2016	2017	2018
Net Profit Margin (%)	2.32	2.78	2.06
EBITDA Margin (%)	5.90	5.96	5.05
Return on Equity (ROE)	13.30	17.05	12.85
Return on Assets (ROA)	6.51	8.22	6.59
Price-to-Book Value (P/B)	1.88	1.53	1.45
Gross Gearing (D/E) (%)	68.21%	42.98%	39.31%
PER	17.39	9.00	11.31
Inventory Turnover	5.87	6.06	5.72
Current Ratio	1.56	1.55	1.64
Working Capital/Revenue (%)	11.81%	8.34%	9.13%

Answer 1

The 10 most important ratios are :

Net Profit Margin (%) : (Net Profit / Sales) * 100

EBITDA Margin (%) = (EBITDA/Sales) * 100

Return on Equity (ROE) = ( Net Profit / Average shareholder equity )

Return on Assets (ROA) = ( Net Profit / Average total assets )

Price to Book Value (P/B) = Price per share / Book Value per share

Gross Gearing (D/E) (%) = (Total Liabilities / Total Shareholder Equity) * 100

PER = Price per share / Earnings per share

Inventory Turnover = Cost of goods sold / Average Inventory

High Inventory turnover implies that the company is selling inventory relatively quickly which means it needs cashflow to make new inventory available. In this case , Inventory turnover increased sharply in 2017 but fell in 2018.

Current Ratio = Current Assets / Current Liabilities

Current Ratio comfortably higher 1 implies that short term assets are higher than short term liabilities which means there should not be too many cash flow problems for the company in the 3 year period.

Working Capital / Revenue (%) = (Working / Gross Sales) * 100

This ratio has decreased sunbstantially in 2017 and 2018 compared to 2016.

It means short term debt and operational expenses have come down significantly. This means cash flow for the company has improved. In addition , Debt/ Equity has come down significantly which again indicates that Cash flow situation has improved in 2017 and 2018 compared to 2016.