Answers - Financial / Ratio Analysis
1. The three major financial statements: • Balance sheet • Income statement • Statement of cash flows
2. It is complicated to compare a given ratio of two companies operating in different sectors/industries because the different nature of operations across industries differ making the ratios vary from industry to industry. For example, some companies have to operate with huge piles of inventory while others have little or no inventory.
3(a). Liquidity ratios: current ratio, quick ratio, debt ratio, cash ratio
(b). Profitability ratios: gross margin, net profit, operating margin, Return On Investments (ROI), Return On Assets (ROA), Return On Equity (ROE), Earnings Per Share (EPS), Price Per Earnings (P/E)
4. Liquidity ratios are used to measure the strength and preparedness of a company in paying its short term obligations.
5. Profitability ratios are used to measure the profits or performance of a company.
6. Current Ratio = Current Assets ÷ Current Liabilities
= 130,000 ÷ 78,000
= 1.67
7. Debt Ratio = Total Assets ÷ Current Liabilities
= 138,000 ÷ 358,000
= 0.39
8. Operating Margin = Operating Income ÷ Net Sales
= 80,000 ÷ 120,000
= 0.67
9 (a). Working capital = Quick assets − Current liabilities
= 130,000 − 78,000
= 52,000
(b). Gross Profit Margin = (Sales − Cost of Goods Sold) ÷ Sales × 100
= (120,000 − 40,000) ÷ 120,000 × 100
= 66%
10 (a). Return on Assets (ROE) = Net Income ÷ Shareholders' equity
= 39,000 ÷ 220,000
= 0.18
(b). Return on Assets (ROA) = Net Income ÷ Total Assets
= 39,000 ÷ 358,000
= 0.11