Question

7. (a) Suppose that ratio analysis shows that a firm has an ROE equal to 18%, total asset turnover equal to 3 times and Net profit margin equal to 4 percent. What is the firm’s debt to total assets (DEBT) Ratio?

b). Suppose that a firm has determined that its ROA is 10 percent and its total assets turnover Ratio is 4. What is the firm’s net profit margin?

(c). How is comparative ratio analysis carried out?

(d). Name three types of users of ratio analyses; what type of ratio does each group emphasize?

Answer 1

Problem		Information provided
1		ROE				18%
		Asset Turnover				3 times
		Net profit Margin				4%
	Assumed that sales is 100
	Given	Asset Turnover	=	Net sales		100.00	=	3	times
				Average total assets		Assets
		Assets	=	Net sales		100.00	=	33.33
				Asset Turnover		3
		Return on equity	=	Net income		4.00	=	18	%
				Shareholders equity		Shareholders equity
		Shareholders equity	=	Net income		4	=	22.22
				Return on equity		18%
		To find out net income following formula used
		Net profit margin	=	Net profit		4.00	=	4	%
				Net sales		100.00
	By Balance sheet Approach
	Equity & liability (Debt)				=	Total Assets
	22.22+Liability (Debt)				=	33.33
	Liability (Debt)				=	33.33-22.22
	Liability (Debt)				=	11.11
	If net income distributed as dividend.
		Debt to Total Asset	=	Debt		11.11		33.33	%
				Total Asset		33.33
	If net income not distributed.
		Debt to Total Asset	=	Debt (33.33-22.22-4)		7.11		21.33	%
				Total Asset		33.33
2	Assuming Total assets is 100
		ROA	=	Net income	=	10		10%
				Total Assets		100
		Asset Turnover	=	Net sales	=	400		4	times
				Average total assets		100
		Net Profit Margin	=	Net Profit	=	10		2.5	%
				Sales		400
3	Comparative analysis carried out by comparing same ratio between competitive companies, industry or sector.
	Each ratio has some predefined limit and criteria which company so better ratio it seems better.
4	Group of user	Type of user				Types or Ratio Used
	Internal	owner, managers, stakeholders etc				Asset utilization , Input output, Efficiency ratio
	External	Prospective investor, debtor, creditor, banks etc				Profitability Ratio, Leverage ratio, Liquidity Ratio