Question

Consider the current and pro forma financial statements that follow.

2018 2019

Sales 200 220

Variable Costs   100 110

Fixed Costs 80 80

Net Income 20 30

Dividends 10 22

Current Assets 120 132

Fixed Assets 200 200

Total Assets 320 332

Current Liabilities 40 44

Long-Term Debt 40 40

Common Stock 40 40

Retained Earnings 200 208

Total Liabilities and Equity 320 332

AFN = 0

Compute the following ratios for 2018 and 2019:

2018 2019

Current Ratio ________ ________

Debt to Assets Ratio ________ ________

Sales to Assets Ratio _______ ________

Net Profit Margin ________ ________

Return on Assets ________ ________

Return on Equity ________ ________

Comment on any trends revealed by your ratio analysis.

Answer 1

The calculation of the following ratio is shown below:

For 2018

Current ratio = Current assets/Current liabilities= 120/40 = 3

Debt to assets ratio = Total debt/Total assets = (Current liabilities + long term debt)/Total assets

= ($40 + $40)/$320 = 25%

Sales to assets ratio = Sales/Total assets = $200/$320 = 62.5%

Net profit margin = Net income/sales = $20/$200 = 10%

ROA = Net income/Total assets = $20/$320 = 6.25%

Return on equity = Net incime/Shareholder's equity = $20/$240 = 8.33%

For 2019

Current ratio = Current assets/Current liabilities= 132/44= 3

Debt to assets ratio = Total debt/Total assets = (Current liabilities + long term debt)/Total assets

= ($44 + $40)/$332 = 25.30%

Sales to assets ratio = Sales/Total assets = $220/$332 = 66.26%

Net profit margin = Net income/sales = $30/$220 = 13.64%

ROA = Net income/Total assets = $30/$332 = 9.04%

Return on equity = Net incime/Shareholder's equity = $30/$248 = 12.10%

No trend revealed.