Please compute, analyze and discuss the following ratios for the Signature Assignment
1. Liquidity Ratios:
(a) Current ratio (formula) = current assets/current liabilities expressed as in decimals. The focus of the current ratio analysis is to find out if a company has cash-flow, or not.
2. Profitability Ratios:
(a) Gross profit margin (formula) = sales – cost of goods sold/sales expressed as percentages
(b) Net profit margin (formula) = net profit after taxes/sales expressed as percentages
(3) Return on investment (formula) = net profit after taxes/total assets expressed as percentages.
For the gross profit margin, cost of goods sold is for companies that manufacture products, while the same for service companies is called cost of sale.
Please note that a revenue amount in the income (P&L) statement is the same as sales. It is a good practice to have a large gross profit margin, so that you have funds left over to cover operating (SG &A) expenses, interest on loans, taxes, and still make a profit.
4. Activity/Asset Management Ratios:
(a) Days of inventory (formula) = inventory/cost of goods sold divided by 365 day
(b) Average collection period (formula) = accounts receivable/sales per year divided by 365 days.
(c) Fixed asset turnover (formula) = sales divided by fixed assets.
Collecting receivables faster in few days and selling the inventory as fast as possible in few days or a week after they were acquired is good for the cash-flow (liquidity) position of the firm.
5. Leverage Ratios:
(4) Debt to asset ratio (formula) = total debt/total assets expressed as percentages. You do this ratio to find out if a company uses debt, or their money to finance new assets.
6. Interest coverage ratio (formula) = earnings before interest and taxes (EBIT) divided by interest expenses.