FINANCIAL STATEMENT ANALYSIS – NUB BSA-2: ACT221_ACTIVITY 1

SGB has 1,000,000 common shares outstanding, with each share priced at P 8.00. In 2023, the company
declared dividends of P 0.10 per share. The balance sheet at the end of 2023 showed approximately the same
amounts as that at the end of 2022. The financial statements for SGB Merchandising are as follows:

Income Statement for 2023 (in thousands)

Sales 4700
Cost of goods sold 2300
Gross Profit 2400
Operating expenses:
Depreciation 320
Other 1230 1550
Income before interest and
taxes 850
Interest expense 150
Income before taxes 700
Income taxes 280
Net Income 420

Balance Sheet at December 31, 2023 (in thousands)

ASSETS LIABILITIES AND SHE

Cash 220 Accunts Payable 190
Accounts Receivable 440 Accrued Expenses 180
Inventory 410 Total Current Liabilities 370
Total Current Assets 1070 Long-term debt 1960
Plant and Equipment 5600 Common stock 1810
-
Accumulated Depreciation 2100 Retained Earnings 430
Total Assets 4570 Total Liabilities and SHE 4570

ANSWER SHEET (2 Decimal Places)

NAME:

1. Current Ratio =
2. Acid-test ratio =
3. Accounts Receivable turnover =
4. Age of Receivables =
5. Inventory turnover =
6. Gross Profit Margin =
7. Operating profit margin =
8. Return on sales =
9. RoA – operational performance =
10. RoA – total management effort =
11. Return on Equity =
12. EPS =
13. P/E Ratio =
14. Dividend yield =
15. Payout Ratio =
16. Debt-ratio =
17. Debt-equity ratio =
18. Times interest earned =
19. Cash flow to total debt =
20. Cash flow margin =
 Working Capital Management - Trainer Part 2

Problem 1: Kang Company has P 8,000,000 in assets.

Temporary current assets P 2,000,000
Permanent current assets P 4,000,000
Fixed assets P 2,000,000
TOTAL ASSETS P 8,000,000
Short-term rates are 5%. Long-term rates are 8%. Earnings before interest and taxes are P 2,200,000.
The tax rate is 40%.
Required:
1. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and
the same is true of short-term financing, what will earnings after taxes be?
2. Assume one-half of temporary level of current assets is financed by short-term financing,
what will earnings after taxes be?
3. Assume that all the temporary level of current assets and 60% of permanent level of current
assets are financed by short-term financing, what will earnings after taxes be?

Problem 2: Assume the following facts about a firm:

Annual cost to maintain a lock box system P 15,000
Cost to process each check P 1.50
Average amount of each check received P 15,000
Number of checks received per year 4,800
Interest rate on borrowed funds 7.5%
Required: Would a lock box system that reduces check clearing time from six to three days be justified?

Problem 3: Abra Incorporated currently sells on credit but offers no cash discount. The firm is
considering a 3 percent cash discount for payment within 10 days. The firm’s current average collection
period is 90 days, sales are 800 films per year, selling price is P 50,000 per film, variable cost per film
is P 30,000, and the average cost per film is P 42,000. The firm expects that the change in credit terms
will result in a minor increase in sales of 20 films per year, that 75 percent of the sales will take the
discount, and the average collection period will drop to 30 days. The firm’s bad debt expense is
expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent
of sales. Collection cost is normally 2% of sales. The firm’s required return on equal risk investments
is 20 percent. Assume 360-days in a year.
a. How much is the incremental contribution margin?
b. How much is the differential investment on accounts receivable?
c. How much is the savings capital cost?
d. How much is the incremental collection cost?
e. How much is the savings in delinquency cost?
f. How much is the incremental discounts?
g. How much is the incremental profit from the revised policy?
Problem 4: Renew Resource Co. has annual credit sales of P 4 million. Its average collection period is
40 days and bad debts are 5% of sales. The credit and collection manager are considering instituting
a stricter collection policy, whereby bad debts would be reduced to 2% of total sales, and the average
collection period would fall to 30 days. However, sales would also fall by an estimated P 500,000
annually. Variable costs are 60% of sales and the cost of carrying receivables is 12%.

a. How much is the incremental contribution margin?

b. How much is the decrease in investment on accounts receivable? How much is the savings
in capital cost?
c. How much is the savings in delinquency cost?
d. How much is the incremental profit from the revised policy?

Problem 5: Irish, Inc. currently has sales of P 15 million. Its credit period and days sales outstanding
are both 30 days, and 1.25 percent of its sales end up as bad debts. The credit management estimates
that, if the firm extends its credit period to 40 days so that is days sales outstanding increases to 40
days, sales will increase by 3 million pesos, but their bad debt losses on the incremental sales would
be 2.5 percent. Variable costs are 70%, and the cost of carrying receivables is 8%. Assume a tax rate
of 40% and 360 days per year.

Required:
1. Compute the incremental investment required to finance the increase in receivables if the
change is implemented.
2. What would be the incremental cost of carrying receivables?
3. What would be the effect of those changes in net income?

Problem 6: Sharmaine Company sells on terms 2/10, net 30. Total sales for the year are P 3,000,000.
Forty percent of the customers pay on the 10th day and take discounts; the other 60% percent pay, on
average, 45 days after their purchases. Assume 360 days per year.

Required:
1. What is the days sales outstanding?
2. What is the average amount of receivables?
3. What would happen to average receivables if Sharmaine enforced its collection policy with the
result that all non-discount customers pay on the 30th day?
 Working Capital Management - Trainer Part 1

Problem 1: Magnus Company is a wholesaler. It purchases 800,000 units of Product X each year for sale to
retailers. The cost of placing an order is P 40. The cost of holding one unit of inventory for one year is P 4.

Required:
1. Compute the EOQ.
2. How many orders would Magnus place under the EOQ policy?
3. Compute the annual carrying cost for the EOQ.
4. Compute the annual ordering cost for the EOQ.

Problem 2: The Hikaru Company purchases 45,000 units of bleaching soap per year. The average purchase
lead time is 20 working days. Maximum lead-time is 26 working days. The company works 300 days per year.

Required:
a. Units of safety stock that the Company should carry?
b. The reorder point for bleaching soap.
c. Assume that the lead time is always 20 days and no delay in delivery has been experienced by the
company. What is the reorder point? How many units of safety stock must be kept by the company in
this case?

Problem 3: Wesley Company estimates its total cash outlays at P160 million during the coming year. The
company normally spends P30 to transfer cash from marketable securities to cash in bank and vice versa.
The marketable securities portfolio currently earns a 4% annual rate of return.

Requirements:
1. Optimal transaction size.
2. Average cash balance.
3. Total annual cost of cash if the company adopts the optimal transaction size.
4. Minimum and maximum cash balances.
5. Assume that the company has to keep P100,000 balance in the bank as safety cash. Repeat
your solution for the first four requirements.

Problem 4: Consider the following date for Ding Corporation:

Cash Sales 3,200,000

Credit Sales 28,800,000
Cost of goods sold 4,374,000
Purchases (80% on account) 17,280,000
Accounts receivable, beginning 820,000
Accounts receivable, ending 1,100,000
Averaged finished goods inventory 364,500
Raw materials used 3,060,000
Average raw materials inventory 170,000
Average accounts payable 384,000

The firm spends 25,200,000 in operating cycle investments each year, at a constant rate. Assume a 360-day
year.
Required:
a. Calculate the firm’s operating cycle.
b. Calculate the firm’s cash conversion cycle.
c. Calculate the amount of resources needed to support the firm’s cash conversion cycle.

Problem 5: Compute the approximate and the effective annual cost of foregoing the cash discount
for each of the following scenarios of Anish Company:

Supplier A : 3/10 net 50

Supplier B : 2/10 net 60

Assuming that the firm needs short-term financing, recommend whether it would be better to give up the
cash discount or take the discount and borrow from a bank at 20% annual interest. Evaluate each
supplier separately.

Problem 6: Fabi Company is negotiating with the Oslo Bank Company for a 1-year P2 million loan. The
bank has offered the company the following alternatives. Calculate the effective annual interest rate for
each of the following.

1. A 9 percent annual rate on a simple interest loan, with no compensating balance required and
interest due at the end of the year.

2. An 8.5 percent annual rate on a simple interest loan, with a 15 percent compensating balance
required and interest again due at the end of the year.
3. An 8 percent annual rate on a discounted loan, with a 20 percent compensating balance.
4. A 7.5 percent add-on loan, payable in twelve equal installments.

Problem 7: Nepo company obtained a short-term bank loan of P 2 million at an annual interest rate of 10%. As
a condition of the loan, the company is required to maintain a 20% compensating balance in its checking account.
The checking account earns interest of 5% per annum. Before the loan was granted, the company maintained a
balance of P 100,000 in its checking account. Compute the effective interest for this loan.
 WORKING CAPITAL MANAGEMENT

Working Capital Management – refers to the administration and control of current assets and current
liabilities to maximize the firm’s value by achieving a balance between profitability and risk.

Working Capital Financing Policies

1. Matching Policy (also called self-liquidating policy or hedging policy) – matching the maturity of
a financing source with an asset’s useful life
- Short-term assets are financed with short-term liabilities.
- Long-term assets are funded by long-term financing sources.
2. Conservative (Relaxed) Policy – operations are conducted with too much working capital;
involves financing almost all asset investment with long-term capital.
3. Aggressive (Restricted) Policy – operations are conducted on a minimum amount of working
capital; uses short-term liabilities to finance, not only temporary, but also part or all of the
permanent current asset requirement.

Cash Management – involves the maintenance of the appropriate level of cash and investment in
marketable securities to meet the firm’s cash requirements and to maximize income on idle funds.

Reasons for Holding Cash

1. Transaction Purposes – firms maintain cash balances that they can use to conduct the ordinary
business transactions; cash balances are needed to meet cash outflow requirements for
operational or financial obligations.
2. Compensating Balance Requirements – a certain amount of cash that a firm must leave in its
checking account at all times as part of a loan agreement. These balances give banks additional
compensation because they can be relent or used to satisfy reserve requirements.
3. Precautionary Reserves – firms hold cash balance in order to handle unexpected problems or
contingencies due to uncertain pattern of cash inflows and outflows
4. Potential Investment Opportunities – excess cash reserved are allowed to build up in anticipation
of a future investment opportunity such as a major capital expenditure project.
5. Speculation – firms delay purchases and store up cash for use later to take advantage of
possible changes in prices of materials, equipment and securities, as well as changes in
currency exchange rates.

The Concept of Float in Cash Management

Types of Floats:
1. Mail Float – peso amount of customers’ payments that have been mailed by a customer but not
yet received by the seller.
2. Processing Float – peso amount of customers’ payments that have been received by the seller
but not yet deposited.
3. Clearing Float – peso amount of customers’ checks that have been deposited but not yet cleared.
Cash Management Strategies
1. Accelerate cash collections
2. Control disbursements
3. Reduce the need for precautionary cash balance

OPERATING CYCLE – the amount of time that elapses from the point when the firm inputs materials
and labor into the production process to the point when cash is collected from the sale of finished
goods.

ECONOMIC CONVERSION QUANTITY (Optimal Transaction Size) – the amount of marketable

securities that must be converted to cash (or vice versa), considering the conversion costs and
opportunity costs involved.

Marketable Securities – short-term money market instruments that can easily be converted to cash.

Reasons for holding Marketable Securities

1. MS serve as substitute for cash balances
2. MS serve as a temporary investment that yields return while funds are idle
3. Cash is invested in MS to meet known financial obligations such as tax payments and loan
amortizations

Accounts Receivable Management – formulation and administration of plans and policies related to
sales on account and ensuring the maintenance of receivables at a pre-determined level and their
collectability as planned.

Ways of Accelerating Collection of Receivables

1. Shorten credit terms
2. Offer special discounts to customers who pay their accounts within a specified period
3. Speed up the mailing time of payments from customers to the firm
4. Minimize float, that is, reduce the time during which payments received by the firm remain
uncollected funds

Aids in Analyzing Receivables

1. Ratio of receivables to net credit sales
2. Receivable turnover
3. Average collection period
4. Aging of accounts
INVENTORY MANAGEMENT - Formulation and administration of plans and policies to efficiently and
satisfactorily meet production and merchandising requirements and minimize costs relative to
inventories.

Economic Order Quantity – the quantity to be ordered, which minimizes the sum of ordering and
carrying costs.

2 𝑥 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝑥 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑

𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡

Assumptions of the EOQ Model:

1. Demand occurs at a constant rate throughout the year.
2. Lead time on the receipt of the orders is constant.
3. The entire quantity ordered is received at one time
4. The unit costs of the items ordered are constant.
5. There are no limitations on the size of the inventory.

Reorder Point – when to reorder is a stock-out problem. The objective is to order at a point in time so
as not to run out of stocks before receiving the inventory ordered but not so early that an excessive
quantity of safety stock is maintained.

SHORT-TERM FINANCING
1. Accounts Payable – the major source of unsecured short-term financing.

 Stretching accounts payable – a firm should pay the bills as late as possible without
damaging its credit rating. When a firm can stretch the payment of accounts payable, the
cost of foregoing the discount is reduced.

2. Bank Loans
a. Single-payment notes – if the interest is payable upon maturity, the effective interest rate is
equal to the nominal rate.
b. Discounted note – the effective interest rate is higher than the nominal rate.
c. Compensating balance – an arrangement whereby a borrower is required to maintain a
certain percentage of amount borrowed as compensating balance in the current account of
the borrower.
 FS Analysis Trainer

Problem 1: White Corporation's financial statements for the last year are shown below.
All figures are in thousands (P000). The firm paid a P1,000 dividend to its stockholders
during the year. Two million shares of stock are outstanding. The stock is currently
trading at a price of P50. There were no sales of new stock. Lease payments totaling
P400 are included in cost and expense.

BALANCE SHEET

ASSETS
Cash P 2,000
Accounts receivable 12,000
Inventory 14,000
Current Assets P28,000
Gross Fixed assets P27,000
Accumulated depreciation (16,000)
Net fixed assets 11,000
Total assets P39,000

LIABILITIES
Accounts payable P 3,000
Accruals 1,000
Current Liabilities P 4,000
Long term Debt 10,000
Equity 25,000
Total liabilities & equity P39,000

INCOME STATEMENT
Sales P100,000
COGS 80,000
Gross Margin P 20,000
Cash Expenses 8,000
Depreciation 1,600
9,600
EBIT P 10,400
Interest 800
EBT P 9,600
Tax 2,600
Net Income P 7,000
Requirements: Compute the following for White Corporation:
1. Current Ratio
2. Quick Ratio
3. Fixed Asset Turnover
4. Total Asset Turnover
5. Debt Ratio
6. Debt to Equity ratio
7. Times Interest Earned (TIE)
8. Return on Sales (ROS)
9. Return on Assets (ROA)
10. Return on Equity (ROE)

Problem 2: We are given the following information for the Pudge Tools Corporation:

Sales (credit) 7,200,000

Cash 300,000
Inventory 2,150,000
Current Liabilities 1,400,000
Asset Turnover 1.20 times
Current ratio 2.50 times
Debt-to-assets ratio 40%
Receivables turnover 8 times

Current assets are composed of cash, marketable securities, accounts receivable, and
inventory. Calculate the following balance sheet items:
a. A/R
b. Marketable Securities
c. Fixed Assets
d. Long-term debt

Problem 3: Assume that net income was P 6,000. No other information is known, except the
following:

Return on equity 10% Return on sales 4%

Gross margin percentage 60% Income tax rate 40%
Current ratio 3:1 Return on assets 5%
Inventory turnover 4 Days sales in receivables 90
Long-term debt to equity 2:3

Required: Using the preceding ratios, construct an income statement and a balance sheet with
as much detail as possible.
Problem 4:
a. The current ratio is 2.5 to 1; the acid-test ratio is 0.9 to 1; cash and receivables are
P270,000. The only current assets are cash, receivables, and inventory. (a) What are
current liabilities? (b) How much is inventory?
b. Accounts receivable turnover is 5 times; inventory turnover is 4 times. The company
recently bought inventory. (a) On the average, how long will it be before the new inventory
is sold? (b) On the average, how long after the inventory is sold will cash be collected?
c. Accounts receivables equal 45 days’ credit sales. The coming year should see sales of
P900,000 spread evenly over the year. What should accounts receivable be at the end of
the year?
d. GGG, Inc. has a debt ratio of 50%, and an equity multiplier of 2. What is GGG's
stockholders' equity if total debt is P100,000?
e. If Basyos has a total asset turnover of 1.8, a fixed asset turnover of 3.2, a debt ratio
of .5 and a total debt of P200,000, how much then the amount of fixed assets?
f. What is Babi's times interest earned, if its total interest charges are P20,000, sales
are P220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.
g. Determine the cost of sales for a firm with the following financial ratios and data:
Current ratio = 3.0 Quick ratio = 2.0
Current liabilities P1,000,000 Inventory turnover = 6 times.
h. Find the sales of the Bengge Company using the
following information:
Current ratio 2.0
Quick ratio 1.6
Current liabilities P200,000
Inventory turnover based
on COGS 8.0
Gross margin % 10%
i. Presented below is information related to Milson, Inc.:
December 31,
2021 2020
Common stock P 75,000 P 60,000
6% Preferred stock 350,000 350,000
Retained earnings (includes net income for current year) 90,000 75,000
Net income for year 60,000 32,000
What is Milson's rate of return on common stock equity for 2021?
j. Given the following information, calculate the market price
per share of WAM Inc.
Net income = P200,000
Earnings per share = P2.00
Stockholders’ equity = P2,000,000
Market/Book ratio = 0.20
Problem 5: Tinker Corporation experienced a fire on December 31, 2021, in which its
financial records were partially destroyed. It has been able to salvage some of the records
and has ascertained the following balances:

December 31, 2021 December 31, 2020

Cash P 300,000 P100,000
Receivables (net) 720,500 1,260,000
Inventory 2,000,000 1,800,000
Accounts payable 500,000 200,000
Notes payable 300,000 600,000
Common stock, P100 par 4,000,000 4,000,000
Retained earnings 1,135,000 1,010,000

Additional information:
1. The inventory turnover is 3.6 times
2. The return on common stockholders’ equity is 22%. The company had no additional
paid in capital.
3. The receivables turnover is 9.4 times
4. The return on assets is 20%
5. Total assets as at December 31, 2020, were P6,050,000.

Requirements: Compute the following:

1. Cost of goods sold for 2021

2. Net income for 2021
3. Total assets as at December 31, 2021

GROSS PROFIT VARIANCE ANALYSIS

Problem 6: Badosa Company prepared the following budgetary information for January of
2022 for its tennis racket:

Sales (12,000 units) P 432,000

Cost of Goods Sold P 288,000
Gross Profit P 144,000

In January, actual operations resulted in the production and sale of 13,000 units which were
sold for a selling price of P 34 per unit. The unit cost of goods sold increased by P 3.
Required:
1. Overall Gross Profit Variance
2. Sales Price Variance
3. Sales Volume Variance
4. Cost Price Variance
5. Cost Volume Variance

Problem 7: Ons Company has requested you to determine the cause of the difference
between its 2021 and 2022 gross profit based on the following data:

2021 2022
Sales P 200,000 P 252,000
Cost of Goods Sold P 120,000 P 180,000
Gross Profit P 80,000 P 72,000

No additional data was made available except that unit sales increased by 20% in 2022.

Required:
1. Overall Gross Profit Variance
2. Price Factor
3. Cost Factor
4. Volume Factor

-END-
 FINANCIAL STATEMENT ANALYSIS

Financial analysis is designed to determine the relative strengths and weaknesses of a

company. Financial analysis concentrates on financial statement analysis, which highlights
the key aspects of a firm’s operations.

Financial statement analysis involves a study of the relationships between income

statement and balance sheet accounts, how these relationships change over time (trend
analysis or horizontal analysis), and how a particular firm compares with other firms in its
industry (bench-marking or vertical analysis).

Three basic tools in financial statements analysis.

1. Horizontal Analysis or Trend Analysis. A technique for evaluating a series of

financial statement data over a period of time. Its purpose is to determine the increase
or decrease that has taken place, expressed either an amount or a percentage.

Percentage Change =

2. Vertical Analysis or Common Size Analysis. It is a technique for evaluating

financial statement data that expresses each item in a financial statement as a percent
of a base amount.

Base amount:
Balance Sheet - Total Assets
Income Statement - Net Sales

3. Ratio Analysis. This technique establishes relationships among financial

statement accounts at given date or period of time. These ratios analyze firm’s
liquidity, the use of leverage, asset management, cost control, profitability, growth,
and valuation.

Basic Rules in Computing Financial Ratios:

- When calculating a ratio using balance sheet amounts only, the numerator and
denominator should be based on amounts as of the same balance sheet date. The
same is true for ratios using only income statement numbers. Exception: calculation of
growth ratios.
- If an income statement amount and a balance sheet amount are sued at the same
time to calculate a ratio, the balance sheet amount should be expressed as an average
for the time period represented by the income statement amount.
 - If the beginning balance of a balance sheet account is not available and cannot be
computed from the given data, the ending balance of the account is sued to represent
the average balance.
- If sales and/or purchases are given without making distinction as to whether made in
cash or on credit, assumptions are made depending on the ratio being calculated:
 Turnover ratios: Sales and purchases are made on credit.
 Cash flow ratios: Sales and purchases are made in cash.
- As a rule, an operating year is assumed to have 360 days, unless specified otherwise.

Financial Ratios:

Tests of Liquidity:

Current Ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 It is a measure of adequacy of

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑡𝑖𝑒𝑠 working capital. It is the
primary test of liquidity to
meet current obligations from
current assets
Quick Ratio 𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠 It measures the number of
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 times that the current
liabilities could be paid with
the available cash and near-
cash assets (i.e., cash,
current receivables and
marketable securities)

Working Capital Activity Ratios

Receivables Turnover 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 It measures the number of

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 times receivables are
recorded and collected
during the period.
Average Age of Receivables 360 𝑑𝑎𝑦𝑠 It indicates the average
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 number of days during which
the company must wait
before receivables are
collected.
Inventory Turnover 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 It measures the number of
𝐴𝑣𝑒. 𝑀𝑒𝑟𝑐ℎ𝑎𝑛𝑑𝑖𝑠𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 times that the inventory is
replaced during the period.
 Average Age of inventory 360 𝑑𝑎𝑦𝑠 It indicates the average
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 number of days during which
the company must wait
before the inventories are
sold.

Raw Materials Turnover Cost of materials used / average RM inventory

Work In Process Turnover Cost of goods manufactured / average WIP
inventory
Finished Goods Turnover CGS / Average FG inventory
Normal Operating Cycle Ave. Age of Inventory + Ave. Age of
Receivables
Trade Payables Turnover Net Credit Purchases / Average Trade
Payables
Average Age of Trade Payables 360 days / Payables Turnover
Current Assets Turnover (CGS + OPEX) / Ave. Current Assets

Test of Solvency

Times Interest Earned EBIT / Interest Expense It determines the extent to

which operations cover
interest expense.
Debt-Equity Ratio Total Liabilities / Total Equity Proportion of assets provided
by creditors compared that
provided by owners
Debt Ratio Total Liabilities / Total Assets Proportion of total assets
provided by creditors
Equity Ratio Total Equity / Total Assets Proportion of total assets
provided by owners.

Test of Profitability

Return on Sales Income / Net Sales Determines the proportion of

sales that went into
company’s earnings.
Return on Assets Income / Average Assets Efficiency with which assets
are used to operate the
business
Return on Equity Income / Average Equity Measures the amount earned
on the owners’ or
stockholders’ investment.
 Earnings Per Share (Net Income – Preferred Measures the amount of net
Dividends) / Wtd. Ave. income earned by each
Common Shares Outstanding common share.

Market Tests

Price-Earnings Ratio Price Per Share / Earnings It indicates the number of

Per Share pesos required to buy P1 of
earnings.
Dividend Yield Dividend Per Share / Price Measures the rate of return in
Per Share the investor’s common stock
investments.
Dividend Pay-Out Dividend Per Share / It indicates the proportion of
Earnings Per Share earnings distributed as
dividends.

Stability Ratios

Fixed Assets to Total Equity Fixed Assets / Total Equity Measures the proportion of
owners’ equity to fixed assets.
Indicative of over or under
investment by owners and
weakness in trading the
equity.
Fixed Assets to Total Assets Fixed Assets (net) / Total Indicates the possible over-
Assets expansion of plant and
equipment
Sales to Fixed Assets (Plant Net Sales / Fixed Assets (Net) Tests roughly the efficiency of
Turnover) management in keeping plant
properties employed.
Book Value per share – CS Common Shareholders’ Measures recoverable
Equity / Common Shares amount by stockholders in the
Outstanding event of liquidation if assets
are realized at their book
values.
Times Preferred Dividend Net Income After Taxes / It indicates ability to provide
Earned Preferred Dividends dividends to preferred
stockholders.
Capital intensity ratio Total Assets / Net Sales Measures efficiency of the
firm to generate sales through
employment of its resources.
 Times fixed charges earned Net income before taxes & Measures ability to meet fixed
fixed charges / (Fixed charges charges
+ sinking fund payment)

Tests of Over-all Short-Term Solvency or Short-Term Financial Position

Working Capital Turnover Net Sales / Average Working Indicates adequacy of

Capital working capital to support
operation (sales)
Defensive Interval Ratio Current Liabilities / Cash & Measures coverage of
Cash Equivalent current liabilities
Payable Turnover Net Purchases / Average Measures efficiency of the
Accounts Payable company in meeting the
accounts payable.
Fixed assets to long-term Fixed Assets / Long-term Reflects extent of the
liabilities liabilities utilization of resources from
long-term debt. Indicative of
sources of additional funds.

Ratios indicative of income position

Rate of return on average Income / Average Current Measures the profitability of

current assets Assets current assets invested
Operating Profit Margin Operating profit / net sales Measures profit generated
after consideration of
operating costs.
Cash flow margin Operating cash flow / net Measures the ability of the
sales firm to translate sales to cash.