RATIO ANALYSIS Fifteen ratios are presented explained and numerically

# Ratio analysis fifteen ratios are presented explained

This preview shows page 21 - 25 out of 48 pages.

and any other expenditures that aren’t strictly necessary to run the business. RATIO ANALYSIS Fifteen ratios are presented, explained, and numerically illustrated on pages 89 – 99 and summarized in Table 3.2 on page 100. Problem 12 just asks you to calculate the ratios for a set of financial statements. The remaining problems ask you to explore the ratios’ meanings and the relationships between them. For most you’ll write a ratio definition as an equation, substitute values for known or targeted variables, and solve for an unknown. Some of the problems contain hints to help you get started. 12. Calculate all of the ratios discussed in the chapter for the Axtel Company of problem 5. Assume Axtel had leasing costs of \$7,267 in 20X1, and had 1,268,000 shares of stock outstanding that were valued at \$28.75 per share at year end. SOLUTION: Current Ratio Curr Assets / Curr Liabilities = \$11,678 / \$2,110 = 5.5 Quick Ratio [Curr Assets - Inv] / Curr Liabs = (\$11,678 - \$3,220) / \$2,110 = 4.0 Average Collection Period (ACP) [Accts Rec / Sales] × 360 = [(\$5,583 / \$36,227) × 360] = 55.5 days 22Chapter 3 Inventory Turnover COGS / Inventory = \$19,925 / \$3,220 = 6.2 × OR Sales / Inventory = \$36,227 / \$3,220 = 11.3 × Fixed Asset Turnover Sales / Fixed Assets = \$36,227 / \$11,047 = 3.3 × Total Asset Turnover Sales / Total Assets = \$36,227 / \$22,725 = 1.6 × Debt Ratio [Long Term Debt + Curr Liab] / Total Assets = (\$6,002 + \$2,110) / \$22,725 = 35.7% Debt to Equity Ratio Long Term Debt : Equity = \$6,002 : \$14,613 = .41:1 Times Interest Earned (TIE) EBIT / Interest = \$5,434 / \$713 = 7.6 × Cash Coverage [EBIT + Deprec] / Interest = (\$5,434 + \$1,166) / \$713 = 9.3 Fixed Charge Coverage [EBIT + Lease Pmts] / [Interest + Lease Pmts] = (\$5,434 + \$7,267) / (\$713 + \$7,267) = 1.6 × Return on Sales Net Income / Sales = \$3,116 / \$36,227 = 8.6% Return on Assets Net Income / Total Assets = \$3,116 / \$22,725 = 13.7% Return on Equity Net Income / Equity = \$3,116 / \$14,613 = 21.3% Price Earnings Ratio (P/E) First calculate the Earnings per Share (EPS) 23 Cash Flows and Financial Analysis EPS = Net Income / # shares outstanding = \$3,116 / 1.268 million = \$2.46 Then P/E = Stock Price / EPS = \$28.75 / \$2.46 = 11.7 Market to Book Value Ratio First calculate the Book Value per Share BV per Shr = Equity / # shares outstanding = \$14,613 / 1.268 million = \$11.52 Then Mkt to Bk Value = Stock Price / BV per shr = \$28.75 / \$11.52 = 2.5 13. Norton Industries recorded total cost of goods sold for 20X2 of \$6.5 million. Norton had the following inventory balances for the months indicated (end of period balances): December, 20X1 \$1.20 million January, 20X2 1.65 million February, 20X2 1.70 million March, 20X2 1.38 million April, 20X2 1.66 million May, 20X2 1.93 million June, 20X2 1.41 million July, 20X2 1.81 million August, 20X2 1.78 million September, 20X2 1.26 million October, 20X2 1.61 million November, 20X2 1.63 million December, 20X2 1.19 million a. Compute inventory turnover for Norton using the following methods to calculate the inventory figure: 1. End of year 2. Average of the beginning and end of year 3. Average of the ends of quarters (use the five quarter ends) 4. Average of the ends of months (use the 13 month ends) b. Which method provides the most accurate picture of Norton’s inventory management? Why? c. Which method do you think Norton is currently using? Why? SOLUTION: a. (1) \$6.5 / \$1.19 = 5.46x (2) \$6.5 / \$1.195 = 5.44x (3) \$6.5 / \$1.288 = 5.05x (4) \$6.5 / \$1.555 = 4.18x b. There is quite a bit of fluctuation in the inventory balances from month to month. This is really only captured by using end-of-month balances. 24Chapter 3 c. We can’t be sure, but there is a rationale that supports a guess that Norton is using the end-of- quarter approach.  #### You've reached the end of your free preview.

Want to read all 48 pages?

• • •  