Question

III.       Key Metrics – Define and calculate each ratio based on the information provided:

1. DSO

2. Coverage Ratio

3. Current ratio

4. D/E

5. DPO

Balance Sheet 3/31/2018
($ in 000s)
Assets
Cash & Equivalents		9,100
A/Receivables		10,500
Inventory		9,000
Net equipment		2,000
Goodwill		3,000
Total Assets		33,600
Liabilities
A/Payables		4,300
Short-term debt		2,500
Long-term debt		8,500
Capital
Shareholder Equity		10,500
Retained Earnings		7,800
Total Liabilities & Equity		33,600
Other financials in actual dollars:
Sales = $100 Million CGS = $47 Million EBIT = $123,000 EBT = $110,000 Net Income = $65,000

Answer 1

1) DSO means days sales outstanding.

DSO is a financial ratio that measures the average collection period after sales.It ascertain the number of days the receivables lies outstanding.

DSO = ( account receivables/ total credit sales) * 365.

DSO = ($10,500,000 / 100,000,000) * 365

DSO = 38.33 days.

2) Coverage ratio:-

It means is ratio for ratio of cash available to cash required for debt servicing. It essentially calculates the repayment capacity of the borrower.

Formula -

Coverage ratio = ( PAT +interest+non cash expenses)   (interest+ repayment of principal)

Here

PAT = 65,000

Interest = EBIT - EBT = $123,000 - $ 110,000 = $ 13,000

Coverage ratio = (65,000+13,000) / 13,000

Coverage ratio = 6 times.

3) Current ratio :-

Current ratio is a vital liquidity ratio which measures liquidity position of a company.

It measures the ability to Current assets is sufficient to pay short liabilities ( current liabilities).

Current ratio = current assets / current liabilities

Current assets = inventory + account receivables + cash & cash equivalents

Cuurent assets = 9,000,000+ 10,500,000 + 9,100,000 = 28,600,000

Current liabilities = account payable + short term debt

Current liabilities = 4,300,000 + 2,500,000 = 6,800,000

Cuurent ratio = current assets / cuury liabilities

= 28,600,000/6,800,000

Current ratio = 4.21 times

4) D/E ratio

The ratio compares a total liabilities to its shareholder equity and can be used to evaluate how much leverage the company using.

Debt to equity ratio = Total liabilities / ( net worth or shareholders equity)

Total liabilities = total liabilities side amount - capital amount

Total liabilities = 33,600,000 - 18,300,000 = 15,300,000

Net worth = shareholders equity + retained earnings

Net worth = 10,500,000 + 7,800,000 = 18,300,000

Debt to equity ratio = 15,300,000/18,300,000

Debt to equity ratio = 0.84 times.

5)DPO

DPO Means days payable outstanding.

Days payable outstanding is a ratio that measures the average number of days a takes to pay its suppliers.

DPO = (Accounts payable/ cost of goods sold) * 365

= (4,300,000/47,000,000)*365

DPO = 33.39 Days.