Ratios and Accounting

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Earnings Performance Analysis

• The amount and consistency of earnings are important measures of a business’ success.

• The earnings of a business must be satisfactory to continue operations.

Earnings Performance Analysis

• Rate earned on average total assets

(Current Year’s Assets + Prior Year’s Assets) / 2 =

Average Total Assets

Net Income (after Tax) / Average Total Assets =

Rate Earned on Average Total Assets

i.e.) (1579700.00 + 2067700.00) / 2 = 1913700.00

222300.00 / 1913700.00 = 11.6%

Earnings Performance Analysis

•Rate earned on average stockholders’ equity

(Current Year Stockholders’ Equity + Prior Year Stockholders’ Equity) / 2 = Average Stockholders’

Equity

Net Income (after Tax) / Average Stockholders’ Equity = Rate Earned on Average Stockholders’ Equity

i.e.) (849300.00 + 1051600.00) / 2 = 950450.00

222300.00 / 950450.00 = 23.4%

Earnings Performance Analysis

•Rate earned on net sales

Net Income (after Tax) / Net Sales =

Rate Earned on Net Sales

i.e.) 222300.00 / 4767200.00 = 4.7%

Earnings Performance Analysis

•Earnings per share

Net Income (after Tax) / Shares of Capital Stock Outstanding = Earnings per Share

i.e.) 222300.00 / 60000 = $3.71

Earnings Performance Analysis

•Price-Earnings Ratio

Market Price per share / Earnings per share =

Price - Earnings Ratio

i.e.) 43.50 / 3.71 = 11.7

Efficiency Analysis

• The profitability and continued growth of a business are influenced by how efficiently the business utilizes its assets.

• The faster a business can convert these assets to cash and begin another operating cycle, the more efficient and profitable the business will be.

Efficiency Analysis

•Accounts Receivable Turnover Ratio

(Current Year Accounts Receivable + Prior Year Accounts Receivable) / 2 =

Average Accounts Receivable

Net Sales on Account / Average Accounts Receivable = Account Receivable Turnover Ratio

i.e.) (569200.00 + 474000.00) / 2 = 521600.00

4767200.00 / 521600.00 = 9.1

Efficiency Analysis

•Average Number of Days for Payment

Days in year / Accounts Receivable Turnover Ratio = Average Number of Days for Payment

i.e.) 365 / 9.1 = 40 days

Efficiency Analysis

•Merchandise Inventory Turnover Ratio

(Current Year Merchandise Inventory + Prior Year Merchandise Inventory) / 2 =

Average Merchandise Inventory

Cost of Merchandise Sold / Average Merchandise Inventory =

Merchandise Inventory Turnover Ratio

i.e.) (423800.00 + 547900.00) / 2 = 485850.00

2602800.00 / 485850.00 = 5.4

Financial Strength

• A successful business needs adequate capital. A business gets its capital from two sources:– Owners’ Investments and retained earnings– Loans

• Some capital, either owned or borrowed is to be used for long periods of time. Some capital is borrowed for short periods of time.

Financial Strength

•Working Capital

Total Current Assets - Total Current Liabilities =

Working Capital

i.e.) 1254100.00 - 596100.00 = 658000.00

Financial Strength

•Current Ratio

Total Current Assets / Total Current Liabilities

= Current Ratio

i.e.) 1254100.00 / 596100.00 = 2.1

Financial Strength

•Acid - Test Ratio

(Cash + Accounts Receivable) / Total Liabilities

= Acid - Test Ratio

i.e.) (206100.00 + 474000.00) / 596100.00 = 1.1

Financial Strength

•Debt Ratio

Total Liabilities / Total Assets = Debt Ratio

i.e.) 1016100.00 / 2067700.00 = 49.1%

Financial Strength

•Equity Ratio

Total Stockholders’ Equity / Total Assets

= Equity Ratio

i.e.) 1051600.00 / 2067700.00 = 50.9%

Financial Strength

•Equity per Share

Total Stockholders’ Equity / Share of Capital Stock Outstanding = Equity per Share

i.e.) 1051600.00 / 60000 = $17.53