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Unit 4: Ratio Analysis





                Depreciation/Total Assets   0.25     0.014    0.018         0.015               Notes
                Days’ sales in receivables  113     98       94            130.25
                Debt to Equity              0.75     0.85     0.90          0.88
                Profi t Margin               0.082    0.07     0.06          0.075
                Total Asset Turnover        0.54     0.65     0.70          0.40
                Quick Ratio                 1.028    1.03     1.029         1.031
                Current Ratio               1.33     1.21     1.15          1.25
                Times Interest Earned       0.9      4.375    4.45          4.65
                Equity Multiplier           1.75     1.85     1.90          1.88
               In the annual report to the shareholders, the CEO of Flipper Inc wrote, “2007 was a good

               year for the firm with respect to our ability to meet our short-term obligations. We had
               higher liquidity largely due to an increase in highly liquid current assets (cash, account
               receivables and short-term marketable securities).” Is the CEO correct? Explain and use
               only relevant information in your analysis.
          7.   In the above question, what will you say when you are asked to provide the shareholders
               with an assessment of the fi rm’s solvency and leverage. Be as complete as possible given
               the above information, but do not use any irrelevant information.
          8.   Firm A has a Return on Equity (ROE) equal to 24%, while firm B has an ROE of 15% during


               the same year. Both firms have a total debt ratio (D/V) equal to 0.8. Firm A has an asset
               turnover ratio of 0.9, while firm B has an asset turnover ratio equal to 0.4. What can we

               analyse about the relationship between both the fi rms?
          9.   If a fi rm has ` 1,00,000 in inventories, a current ratio equal to 1.2, and a quick ratio equal to

               1.1, what is the firm’s Net Working Capital?
          10.   What can you say about the asset management of the  firm discussed in question 6?

               Be as complete as possible given the above information, but do not use any irrelevant
               information.

          11.   The data summarised in the table below show the performance of two firms A and B, over
               fi ve years.














               (a)   Using the information in the table explain the comparative attractiveness of the two

                    firms to a potential investor.
               (b)   Why is it important that potential investors should be aware of the ratio of ordinary
                    share capital to other forms of long-term fi nance?

          Answers: Self Assessment

          1.   fi nancial statement               2.   quantitative
          3.   capital structure                 4.  profi tability




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