RATIO ANALYSIS OF FINANCIAL STATEMENTS ( Emperador Co.

Liquidity Ratio

A. Current Ratio

For Emperador Co., the current assets are P56,000,020,273 and the current liabilities

are P20,217,389,290; thus, the current ratio for 2018 is

56000020273
= 2.77
20217389290

It indicates that for every peso that the Emperador Co. pay within the year, there is

P2.77 in an asset that is either cash or should become cash during the year. The

Emperador Co.’s current ratio exceeds the desired ratio of 2:1. It means that the

company still would be able to meet its short-term liabilities as they become due.

B. Quick Ratio

For Emperador Co., the quick ratios are

56,000,020,273 − 28,395,973,338
= 1.37
20,217,389,290

6,228,229,892 + 18,875,783,362
= 1.24
20,217,389,290

They are both lower than the current ratio of 2.77 determined previously because of the

result of inventory that the company is carrying. However, the value of 1.24 obtained by

using the alternative definition of quick ratio is lower than the usual which is 1.37. It may

be preferred to use either 1.37 or 1.24 if Emperador Co. do not want to overstate its

capacity to pay its current liabilities as they become due.

Activity Ratio

A. Inventory Turnover

The Emperador Co.’s 2017 year-end inventory was P25,186,966.124, the inventory

turnover for 2018 is

47,050,421,022
= 1.8
(28,395,973,338 + 25,186,966,124)/2

It indicates that annual sales are 1.8 times the level of inventory. Inventory turns over 1.8

times a year or about every 6.7 months.

The inventory turnover may be expressed in days:

365
= 203 𝑑𝑎𝑦𝑠
1.8

In the illustration above, it indicates that Emperador Co. holds an average item of

inventory for 203 days. It means that Emperador Co. will need to find financing earlier for

that period of time to carry the inventory in order to avoid physical deterioration.

B. Receivables Turnover

The Emperador Co. income statement does not give annual credit sales, so the annual

sales can be used. When the alternative definition is used, receivables turnover is

47,050,421,022
= 2.8
(18,875,783,362 + 14,694,733,441)/2

It indicates that 2.8 times a year or about every 4.3 months the accounts/ trade

receivables are collected.

1B. Average Collection Period

The average collection period or the “days sales outstanding” is

365
= 130 𝑑𝑎𝑦𝑠
2.8

It implies that when the Emperador Co. makes a credit sale instead of cash sale , it can

expect payment in 130 days. It is not good for company because it takes a longer time to

collect its receivables.

C. Fixed Asset Turnover

For Emperador Co., the fixed asset turnover is

47,050,421,022
= 1.73
27,247,873,634

It indicates that sales are 1.7 times fixed assets (property, plant and equipment). The

ratio is low which means Emperador Co. is employing smaller amount of plant and

equipment.

D. Total Asset Turnover

For Emperador Co., the total asset turnover is

47,050,421,022
= 0.40
117,818,371,682
 It indicates that Emperador Co. needs P1.00 in assets for every 40 cents generated in

revenues.

Profitability Ratio

A. Operating Profit Margin

For Emperador Co., the operating profit margin is

8,436,364,409
= 17.93%
47,050,421,022

It indicates that the Emperador Co. earns P0.179 before interest and taxes for every

peso of sales

B. Net Profit Margin

For Emperador Co., the net profit margin is

6,828,949,731
= 14.51%
47,050,421,022

It indicates that the Emperador Co. earns P0.145 after interest and taxes for every peso

of sales.

C. Gross Profit Margin

For Emperador Co., the gross profit margin is

47,050,421,022 − 30,305,123,521
= 35.59%
47,050,421,022

It indicates that Emperador Co. earns P0.36 on every peso of sales before considering

selling, distribution, general, administrative and financing expense.

DuPont System

A. Return on Total Assets

For Emperador Co., the return on total assets is

6,828,949,731
= 5.8%
117,818,371,682

It indicates that Emperador Co. returns P0.058 for every peso invested in assets.

B. Return on Equity

For Emperador Co., the return on the equity is

6,828,949,731
= 11.13%
61,363,946,340
 It indicates that Emperador Co. returns P0.111 for every peso invested by the common

stockholders.

Basic Earning Power

The basic earning power is

8,346,364,409
= 7.08%
117,818,371,682

It indicates that P1.00 of Emperador Co.’s assets generates P0.070 in operating income

(income before paying interest and taxes). The basic earning power is less so that the

creditors’ interest payment is not safe.

Leverage Ratio

A. Debt/Net Worth Ratio

The total debt of Emperador Co. is P56,454,425,342 and total equity of

P61,363,946,340. Therefore, the value of debt/net worth ratio is

56,454,425,342
= 0.92
61,363,946,340

The debt-to-equity ratio indicates that there is P0.92 debt for every peso of equity.

B. Debt Ratio

The total debt of Emperador Co. is P56,454,425,342 and total assets of

P117,818,371,682. Therefore, the value of debt ratio is

56,454,425,342
= 0.92
117,818,371,682

The debt-to-asset ratio indicates that debt is financing 47.92 percent of the company’s

assets. It means that the value of the assets may decline by 52.08 percent before the

equity is destroyed, leaving only enough assets to pay off the debt.

Coverage Ratio

A. Times-interest-earned ratio

For Emperador Co., the times-interest-earned ratio is

8,436,364,409
= 15.24
553,560,263
It indicates that Emperador Co. had operating income of P15.24 for every P1.00 in

interest expense, which suggests that the company should easily meet its interest

obligations.