Financial Ratios Analysis
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Financial Statement Analysis
Hypothetical Financial Statement Data
Financial Position (FP)
Account Amount
Current Assets 500,000
Inventory 200,000
Accounts Receivable 150,000
Current Liabilities 250,000
Fixed Assets (Net) 800,000
Total Assets 1,300,000
Total Debt 600,000
Total Equity 700,000
Comprehensive Income Statement (CIS)
Account Amount
Net Sales 1,000,000
Cost of Goods Sold (COGS) 600,000
Operating Income (EBIT) 250,000
Net Income 120,000
Shares Outstanding 50,000
Market Price per Share 15
Cash Flow from Operations 150,000
Step 1: Calculate Ratios
Liquidity Ratios
1. Current Ratio = Current Assets / Current Liabilities
= 500,000 / 250,000 = 2.0
Current Assets
Formula: Current Ratio = Current Liabilities
2. Quick Ratio = (Current Assets - Inventory) / Current Liabilities
= (500,000 - 200,000) / 250,000 = 1.2
Current Assets−Inventory
Formula: Quick Ratio = Current Liabilities
Efficiency Ratios
3. Inventory Turnover Ratio = COGS / Average Inventory
= 600,000 / 200,000 = 3.0
COGS
Formula: Inventory Turnover Ratio = Inventory
4. Days Sales Outstanding (DSO) = (Accounts Receivable / Net Sales) \times 365
= (150,000 / 1,000,000) \times 365 = 54.75 days
Formula: DSO = Accounts
Receivable
Net Sales
× 365
5. Fixed Asset Turnover Ratio = Net Sales / Fixed Assets
= 1,000,000 / 800,000 = 1.25
Net Sales
Formula: Fixed Asset Turnover Ratio = Fixed Assets
6. Total Asset Turnover Ratio = Net Sales / Total Assets
= 1,000,000 / 1,300,000 = 0.77
Net Sales
Formula: Total Asset Turnover Ratio = Total Assets
Leverage Ratios
7. Debt to Equity Ratio = Total Debt / Total Equity
= 600,000 / 700,000 = 0.86
Total Debt
Formula: Debt to Equity Ratio = Total Equity
8. Debt Ratio = Total Debt / Total Assets
= 600,000 / 1,300,000 = 0.46
Total Debt
Formula: Debt Ratio = Total Assets
Profitability Ratios
9. Net Profit Margin = Net Income / Net Sales
= 120,000 / 1,000,000 = 12%
Formula: Net Profit Margin = Net Income
Net Sales
10. Basic Earning Power (BEP) = EBIT / Total Assets
= 250,000 / 1,300,000 = 19.23%
EBIT
Formula: BEP = Total Assets
11. Return on Assets (ROA) = Net Income / Total Assets
= 120,000 / 1,300,000 = 9.23%
Net Income
Formula: ROA = Total Assets
12. Return on Common Equity (ROE) = Net Income / Total Equity
= 120,000 / 700,000 = 17.14%
Formula: ROE = NetEquityIncome
Market Ratios
13. Price-Earnings (P/E) Ratio = Market Price per Share / Earnings per Share
= 15 / (120,000 / 50,000) = 6.25
Market Price per Share
Formula: P/E Ratio = Earnings per Share
14. Price to Cash Flow Ratio = Market Price per Share / Cash Flow per Share
= 15 / (150,000 / 50,000) = 5.0
Market Price per Share
Formula: Price to Cash Flow Ratio = Cash Flow per Share
Step 2: Analysis (GOOD, OKAY, POOR)
Ratio Value Benchmark/Analysis Classification
Current Ratio 2.0 2.0 is generally acceptable GOOD
Quick Ratio 1.2 Above 1 is acceptable OKAY
Inventory Turnover 3.0 Moderate turnover OKAY
DSO 54.75 days Less than 60 days is good GOOD
Fixed Asset Turnover 1.25 Moderate efficiency OKAY
Total Asset Turnover 0.77 Below 1 is low POOR
Debt to Equity 0.86 Less than 1 is safe GOOD
Debt Ratio 0.46 Less than 50% is good GOOD
Net Profit Margin 12% Above 10% is healthy GOOD
BEP 19.23% High earning efficiency GOOD
ROA 9.23% Close to 10% is good OKAY
ROE 17.14% Above 15% is strong GOOD
P/E Ratio 6.25 Below 10 is undervalued GOOD
Price to Cash Flow 5.0 Below 10 is strong GOOD
Final Notes
This analysis now includes the precise formulas from your reviewer. Adjust the classifications if specific benchmarks differ or additional context is provided by your professor.
