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RATIO USED TO GAUGE ASSET MANAGEMENT EFFICIENCY AND LIQUIDITY

NAME FORMULA SIGNIFICANCE

TRADE RECEIVABLE NET SALES Velocity of collection of trade


TURNOVER accounts and notes; test of
AVERAGE TRADE RECEIVABLE efficiency of collection

AVERAGE COLLECTION 360 DAYS Evaluates the liquidity of accounts


PERIOD receivable and the firms credit
RECEIVABLE TURNOVER policies.

MERCHANDISE INVENTORY COST OF GOODS SOLD Measures efficiency of the firm in


TURNOVER managing and selling inventories.
AVERAGE MERCHANDISE
INVENTORY

FINISHED GOODS COST OF GOODS SOLD Measures efficiency of the firm in


INVENTORY managing and selling inventories.
AVERAGE FINISHED GOOD
INVENTORY

GOODS IN PROCESS COST OF GOODS Measures efficiency of the firm in


TURNOVER MANUFACTURED managing and selling inventories.

AVERAGE GOODS IN
PROCESS INVENTORY

RAW MATERIALS TURNOVER RAW MATERIALS USED Number of times raw materials
inventory was used and replenished
AVERAGE RAW MATERIALS during the period.
INVENTORY

DAYS SUPPLY IN INVENTORY 360 DAYS Measures average number of days


to sell or consume the average
INVENTORY TURNOVER inventory.

WORKING CAPITAL NET SALES Indicates adequacy and activity of


TURNOVER working capital.
AVERAGE WORKING CAPITAL

PERCENT OF EACH AMOUNT OF EACH CURRENT Indicates relative investment in each


CURRENT ASSET TO TOTAL ASSET ITEM current asset.
CURRENT ASSET
TOTAL CURRENT ASSETS

CURRENT ASSET COST OF SALES + Measures movement and utilization


TURNOVER OPERATING EXPENSES + of current resources to meet
INCOME TAXES + OTHER operating requirements.
EXPENSES (NET)

AVERAGE CURRENT ASSETS


PAYABLE TURNOVER NET PURCHASES Measures efficiency of the company
in meeting trade payable
AVERAGE ACCOUNTS
PAYABLE

OPERATING CYCLE AVERAGE CONVERSION Measures the length of time required


PERIOD OF INVENTORIES + to convert cash to finished goods;
AVERAGE COLLECTION then to receivable and then back to
PERIOD OF RECEIVABE + cash.
DAYS CASH

DAYS CASH AVERAGE CASH BALANCE Measures availability of cash to


meet average daily cash
CASH OPERATING COSTS requirement.
360 DAYS
NET CASH FROM OPERATING
FREE CASH FLOW ACTIVITIES CASH USED FOR Excess of operating cash flow over
INVESTING ACTIVITIES AND basic needs.
DIVIDENDS

INVESTMENT OR ASSET NET SALES Measures efficiency of the firm in


TURNOVER managing all assets.
AVERAGE TOTAL ASSETS

SALES TO FIXED ASSETS NET SALES Tests roughly the efficiency of


management in keeping plant
AVERAGE FIXED ASSETS properties employed.

CAPITAL INTENSITY RATIO TOTAL ASSET Measures efficiency of the firm to


generate sales through employment
NET SALES of its resources.

RATIO USED TO GAUGE A FIRMS UTILIZATION OF DEBT AND COMPANY STABILITY

NAME FORMULA SIGNIFICANCE

DEBT RATIO TOTAL LIABILITIES Shows proportion of all assets that


are financed with debt.
TOTAL ASSETS

EQUITY RATIO TOTAL EQUITY Indicates proportion of assets


provided by owners. Reflects
TOTAL ASSETS financial strength and caution to
creditors.
DEBT TO EQUITY RATIO TOTAL LIABILITIES Measures debt relative to amounts
of resources provided by owners.
TOTAL EQUITY

FIXED ASSETS TO LONG- FIXED ASSET Reflects extent of investment in


TERM LIABILITIES long-term assets financed from long-
TOTAL LONG-TERM term debt.
LIABILITIES

FIXED ASSETS TO TOTAL FIXED ASSETS Measures the proportion of owners


EQUITY capital invested in fixed assets.
TOTAL EQUITY

FIXED ASSETS TO TOTAL FIXED ASSETS Measures investment in long-term


ASSETS capital assets.
TOTAL ASSETS

BOOK VALUE PER SHARE OF ORDINARY SHAREHOLDERS Measures recoverable amount in the
ORDINARY SHARES EQUITY event of liquidation if assets are
realized at their book values.
NO. OF OUTSTANDING
ORDINARY SHARES

TIMES INTEREST EARNED OPERATING INCOME Measures how many times interest
expense is covered by operating
INTEREST EXPENSE profit.

TIMES PREFERRED NET INCOME AFTER TAXES Indicates ability to provide dividends
DIVIDEND REQUIREMENT for preference shareholders.
EARNED PREFERRED DIVIDENDS
REQUIREMENT

TIMES FIXED CHARGES NET INCOME BEFORE TAXES Measures coverage capability more
EARNED + FIXED CHARGES broadly than times interest earned
by including other fixed charges.
FIXED CHARGES

RATIO USED TO GAUGE A FIRMS PROFITABILITY AND RETURN TO OWNERS

NAME FORMULA SIGNIFICANCE

GROSS PROFIT MARGIN GROSS PROFIT Measures profit generated after


consideration of cost of product sold.
NET SALES
OPERATING PROFIT MARGIN OPERATING PROFIT Measures profit generated after
consideration of operating costs.
NET SALES

NET PROFIT MARGIN NET INCOME Measures profit generated after


consideration of all expenses and
NET SALES revenues.

CASH FLOW MARGIN CASH FLOW FOR OPERATING Measures ability to the firm to
ACTIVITIES translate sales to cash.

NET SALES

RETURN ON ASSETS NET INCOME Measures overall efficiency of the


firm in managing assets and
AVERAGE TOTAL ASSETS generating profits.

RETURN ON EQUITY NET INCOME Measures rate of return on resources


provided by owners.
AVERAGE STOCKHOLDERS
EQUITY

EARNINGS PER SHARE NET INCOME PREFERENCE Peso return on each ordinary share.
DIVIDENDS Indicative of ability to pay dividends.

AVERAGE ORDINARY SHARES


OUTSTANDING

PRICE/EARNING RATIO MARKET VALUE PER SHARE Measure relationship between a


OF ORDINARY SHARES price of ordinary shares in the open
market and profit earned on a per
EARNING PER SHARE OF share basis.
ORDINARY SHARES

DIVIDEND PAYOUT DIVIDENDS PER SHARE Shows percentage of earnings paid


to shareholders.
EARNINGS PER SHARE

DIVIDEND YIELD ANNUAL DIVIDENDS PER Shows the rate earned by


SHARE shareholders from dividends
relative to current price of stock.
MARKET VALUE PER SHARE
OF ORDINARY SHARES

DIVIDENDS PER SHARE DIVIDENDS PAID Shows proportion of income


distributed to shareholders on a per
ORDINARY SHARES share basis.
OUTSANDING
RETURN ON AVERAGE NET INCOME Measures the profitability of current
CURRENT ASSETS assets invested.
AVERAGE CURRENT ASSETS

RATE OF RETURN PER RATE OF RETURN ON Shows profitability of each turnover


TURNOVER OF CURRENT AVERAGE CURRENT ASSETS of current assets.
ASSETS
CURRENT ASSETS TURNOVER

MRJM Company
Statement of Financial Position
December 31, 2014 and 2015

2015
2014

Assets
Current Assets
Cash P 25,000 P
22,500
Marketable Securities 23,480
26, 430
Accounts Receivable 35,768
34,678
Allowance for Doubtful Accounts (768)
(678)
Inventories 57,800
49,920
Prepaid Expenses 3,000
5,,000
Total Current Assets P 144,280 P
137,850

Property, Plant and Equipment


Land P 4,700 P 4,700
Building 10,980 7,390
Equipment 22,450 19,600
P 38, 130 P
31,690
Less: Accumulated Depreciation and amortization 7950
5870
Net Property, Plant and Equipment P 30,180
P 25 820
Other Assets P 2,900 P
5,000
Total Assets P 177,360 P
168,670

Liabilities and Equity


Current Liabilities
Accounts payable P 25,490 P
22,830
Notes payable 11,950
9,950
Current maturities of long-term debt 9,800
14,300
Accrued Liabilities 12,980
10,650
Total Current Liabilities P 60,220 P
57,730
Deferred Income Taxes 9,890
7,880
Long-term debt 18,750
15,250
Total Liabilities P 83,860 P 80,860

Equity
Ordinary Shares, par value P1, authorized 10,000,000 P 30,000 P
35,000
shares; issued 3,000,000 shares in 2015 and 3,500,000
shares in 2014
Additional paid-in capital 9,300 4,560
Retained Earnings 54,200
48,250
Total Equity P 93,500 P
87,810

Total Liabilities and Equity P 177,360 P 168,670

MRJM Company
Income Statements and Retained Earnings
December 31, 2014 and 2015

2015 2014
Net Sales P 250,000 P 155,000
Cost of goods sold 98,000
65,000
Gross profit 152,000 90,000

Selling and Administrative expenses 45,000


36,000
Advertising 10,000 9,000
Lease Payments 8,000 5,000
Depreciation and amortization 5,500
3,000
Repairs and Maintenance 2,500
1,250
Totals 71,000 54,250
Operating profit 81,000 35,750

Other Income (Expenses)


Interest income 8,000
12,250
Interest expense (14,000) (19,000)
Earnings before income taxes 75,000
29,000

Income taxes 57,000


18,000
Net Income 18,000 11,000

STATEMENTS OF RETAINED EARNINGS


Retained earnings at beginning of year 48,250
43,500
Net Income 18,000 11,000
Cash dividends (12,050) (6,250)
Retained Earnings at end of year P 54,200 P
48,250

Profit Margin

*Shows the relationship between sales and the cost of products sold, measures the ability of a
company both to control costs and inventories or manufacturing of products and to pass along
price increases through sales to customers.
*MRJM Company gross profit margin has been stable.

*Stability considered a positive sign even if the company had to offer probably discounted items
to attract customers or feature sale to hasten up inventory turnover.

Return on Asset (Investment) and Return on Equity

*Two ratios that measure the overall efficiency of the firm in managing its total investment in
assets and generating return to shareholders.

*The Ratio indicates the amount of profit earned relative to the level of investment in total assets
and investment of common shareholders.

*If the current year is higher than the last year indicates a successful use of financial leverage
although borrowing increased. The firm has generated sufficient operating returns to more than
cover the interest payments on borrowed funds.

Current Ratio

*Measure of a short term debt paying ability. Its significance could be best evaluated by
comparing this with industry competitors or the companys trend of liquidity over a longer
period.

*A declining ratio could indicate a deteriorating financial condition or it might be the result of
paring of obsolete inventories or other stagnant current assets. An increasing ratio might be the
result of an unwise stock piling of inventory or it might indicate an improving financial situation.

*The liquidity of the assets may vary considerably from the date on which the statement of
financial position is prepared. Furthermore, it could have a relatively high current ratio but not be
able to meet the demands for cash because the accounts receivable are of inferior quality or the
inventory is saleable only at discounted price.

Quick Ratio
*Companys test of ability to meet its short-term debts.

*Designed to measure how well a company can meet its obligations without having to liquidate
or depend too heavily on is inventory. Since inventory is not an immediate source of cash and
may not even saleable in times of economic stress, it is generally felt that to be properly
protected, each peso of liabilities should be backed by at least P1 of quick assets.

*The acid test ratio must also be examined in relation to other firms in the same industry.
Debt to Total Assets

*Measures the proportion of all assets that are financed with debt.

*The use of debt involves risk because debt carries a fixed obligation in the form of interest
charges and principal repayment. Failure to satisfy the fixed charges associated with debt will
ultimately result in the bankruptcy. Too much debt would pose difficulty in obtaining additional
debt financing when needed or that credit is available only at extremely high rates of interest
and most onerous terms.

*Generally, the higher the proportion of debt, the greater risk because creditors must be satisfied
before owners in the event of bankruptcy.

Time Interest Earned


*Most common measure of the ability of a firms operation to provide protection to a long term
creditors.

*The more times a company can cover its annual interest expense from operating earnings, the
better off will be the firms investors.

Fixed Charge Coverage


*Measures the firms coverage capability to cover not only payments but also the fixed payment
associated with leasing which must be met annually.

*The ratio is particularly important for firms that operate extensively with leasing arrangements,
whether operating leases or capital leases.