Short term solvency ratios Current ratio Current assets Current liabilities

Short term solvency ratios current ratio current

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Short-term solvency ratios:Current ratio = Current assets / Current liabilitiesCurrent ratio 2008= $56,260 / $38,963 = 1.44 timesCurrent ratio 2009= $60,550 / $43,235 = 1.40 timesQuick ratio = (Current assets – Inventory) /Current liabilitiesQuick ratio 2008= ($56,260 – 23,084) / $38,963 = 0.85 timesQuick ratio 2009= ($60,550 – 24,650) / $43,235= 0.83 timesCash ratio = Cash / Current liabilitiesCash ratio 2008 = $21,860 / $38,963 = 0.56 timesCash ratio 2009 = $22,050 / $43,235 = 0.51 times13
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Asset utilization ratios:Total asset turnover = Sales / Total assetsTotal asset turnover= $305,830 / $321,075 = 0.95 timesInventory turnover= Cost of goods sold/ InventoryInventory turnover = $210,935 / $24,650 = 8.56 timesReceivables turnover = Sales / Accounts receivableReceivables turnover = $305,830 / $13,850 = 22.08 times14
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Long-term solvency ratios:Total debt ratio = (Total assets – Total equity) / Total assetsTotal debt ratio 2008= ($290,328 – 176,365) / $290,328 = 0.39Total debt ratio 2009= ($321,075 – 192,840) / $321,075 = 0.40Debt-equity ratio = Total debt / Total equityDebt-equity ratio 2008 = ($38,963 + 75,000) / $176,365 = 0.65Debt-equity ratio 2009 = ($43,235 + 85,000) / $192,840 = 0.66Equity multiplier = 1 + D/EEquity multiplier 2008 = 1 + 0.65 = 1.65Equity multiplier 2009 = 1 + 0.66 = 1.66Times interest earned= EBIT / InterestTimes interest earned= $68,045 / $11,930 = 5.70 timesCash coverage ratio= (EBIT + Depreciation) / InterestCash coverage ratio = ($68,045 + 26,850) / $11,930 = 7.95 times15
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Profitability ratios:Profit margin= Net income / SalesProfit margin= $36,475 / $305,830= 0.1193 or 11.93%Return on assets= Net income / Total assetsReturn on assets= $36,475 / $321,075 = 0.1136 or 11.36%Return on equity= Net income / Total equityReturn on equity= $36,475 / $192,840= 0.1891 or 18.91%16
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#6: Calculate Smolira Golf Corp’s 2009 ROE by usingthe Extended Du Pont Equation. Clearly show all parts of the Du Pont Equation values using answers from #5. PM = 11.9266% (part l)TATO = 0.9525 times (part d)EM = 1.6650 (part i)ROE = PM*TATO*EM = 0.119266*0.9525*1.665 = 18.91% (part n)#7: Smolira Gold Corp uses Accounts Payable to fund $5,000 increase in Inventory in 2009. Without using any calculations, what is the resultant impact to Current Ratio for 2009 – Increase, Decrease or Stay the same? Decrease.When CR is >1 (#5 part a), increase of the same magnitude to CA and CL will result in CR falling.When CR is <1, increase of the same magnitude to CA and CL will result in CR rising.17
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Important Things to RememberUnderstand the relationship among the items in the financial statements;The relationship among financial ratios;Balance these financial ratios in practice;Like driving, safety is most important than growth, profitability, market share, ….Make sure that the trend of profitability, asset turnover, liability ratios… are improving along time; 18
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  • Spring '11
  • tohmunheng

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