Chapter 5.

Financial Ratios
1. Given the following income statement and balance sheet for a company
Balance sheet
 Assets 2015 2016 2017
Cash 450 500 450
Account receivable 500 600 660
Inventory 450 500 550
Total CA 1400 1600 1660
PP&E 1000 1000 1250
Total assets 2400 2600 2910
       
Liabilities      
Account payable 480 500 550
Longterm debt 800 700 1102
Total liabilities 1280 1200 1652
Equity      
Common stock 400 400 538
Retained earnings 720 1000 720
Total liabilities & Equity 2400 2600 2910

Income statement
  2016 2017
Sales 2800 3000
COGS -1150 -1000
Gross profit 1650 2000
SG&A 490 500
Interest expense 135 151
EBT 1025 1349
Taxes (30%) 307.5 404.7
Net income 717.5 944.3
Calculate and interpret the Activity ratios, Liquidity ratios, Solvency ratios and
Profitability ratios.
Answer
1.1 Activity ratios
Working capital turnover = Revenue / Average working capital
Total asset turnover = Revenue / Average total assets
Inventory turnover = Cost of sale / Average inventory
Receivables turnover = Revenue / Average receivables.

Year

Number Activity ratios 2016 2017

1 Inventory turnover (2,3) (1,82)

2 Receivables turnover 4,67 4,55

3 Toatl asset turnover 1,08 1,03

5 Working capital turnover 2,55 2,70

Most of the activities ratios had been improved in 2018, except for the receivable
turnover
Company managed fixed assets and inventory better . Inventory turnover is
generally low but tends to increase from minus 2.3 turns in 2016 to minus 1.82 turns in
2017 and the number of days an inventory turnover is long over the years. The higher this
ratio, the better, because a high inventory turnover means that the business is selling the
goods very quickly and the user demand for that item is great. This proves that the
inventory turnover has increased over the years, but it is not possible to conclude about
the efficiency of inventory management because it depends on the inventory management
plan.
Receivables turnover in 2018 is 25.79 rounds, but a slight increase of 2.8 rounds in
2020 shows that the business is paid off by customers quite quickly but not significantly.
The higher the turnover ratio, the faster the business is paid back by customers
Companies with low total assets turnover tend to wane over the years, which
shows that the company is effectively using its assets to generate sales.
Fixed asset turnover tends to increase sharply from 4.37 rounds in 2018 to 5.92
rounds in 2020. Higher fixed asset turnover indicates that a company has effectively used
fixed asset investments to generate revenue. out revenue. If a business has a higher fixed
asset turnover than other companies in the same industry, it shows that the company is
better at using its fixed assets than the competition to generate revenue for the business.
 The company's working capital turnover tends to increase slightly from 2016 to
2017 by only 0.25 rounds, which shows that the company is having a good signal because
the higher the working capital turnover ratio, the more efficient it is in using capital. The
higher the working capital, the faster the working capital will help the business generate
more cash and revenue.

1.2 Liquidity ratios

Current ratio = Current assets / Current liabilities
Quick ratio = ( Cash + Short-term marketable investments + Account receivables) /
Current liabilities
Cash ratio = ( Cash + Short-term marketable investment) / Current liabilities

    Year
Number Liquidity ratio 2016 2017
1 Current ratio 3,2 3,02
2 Quick ratio 2,2 2,02
3 Cash ratio 0,82
1,00

The current ratio tends to increase slightly, showing that solvency is guaranteed,
meaning that 1 VND of short-term debt is guaranteed by 0.85 VND of assets in 2018, the
guaranteed value decreased slightly by 0.01 VND in 2019. and by 2020 slightly increased
to 1.00, proving that the business has high liquidity. Usually, for businesses with a quick
ratio of 1 or greater, the ability to pay the short-term debt is high. In fact, the ability to
pay debts of enterprises will easily be implemented. The current Ratio is lower than 1.00,
the ability to pay debts immediately is too difficult. At this point, companies may be
facing financial problems.

The quick ratio tends to increase slightly: in 2018 the quick ratio is 0.21 which
means that 1 dong of short-term debt is guaranteed by 0.21 dong, assets decrease to 0.02
dong in 2019 but it is negligible and in 2020 slightly increased to 0.29.
+ In general, the quick ratio of the years is less than 1, which shows us that the business
has no real current assets to pay for short-term debt. In other words, investors should
exercise caution when considering potential investment businesses.
+ On the contrary, when the quick ratio of the company is equal to 1 or greater than 1, it
means that the total value of current assets is equal to the current assets of the enterprise.
Besides, this is also a good sign for investors when that business has enough potential to
pay its current debts without having to sell long-term assets, which means that the
company can maintain sales performance and asset diversification potential in the long
term. When the quick ratio of an enterprise increases, the liquidity capacity also
increases. This is a good sign not only for the investor community but also for creditors
who want businesses to repay their debts promptly.

The cash ratio in 2016 is quite high with only 1.00 and tends to decrease slightly
in 2017 to 0.82. The higher the payment ratio in cash, the more trusted the payment
feature of the business, and on the contrary, the lower the payment ratio, the more
difficult it is for the organization's solvency to be trusted.
2.3 Solvency ratios
Debt - to - assets ratio = Total debt / Total assets
Financial leverage ratio = Average total assets / Average total equity
Interest coverage = EBIT / Intersest payments

    Year
Number Solvency ratios 2016 2017
Debt - to - assets
1 0,46 0,57
ratio
Financial leverage
2 1,86 2,31
ratio
3 Interest coverage 7,59 8,93

Debt - to - assets ratio in 2017 was 0.0.48, up 0.11 from 206 indicating higher
leverage and therefore higher financial risk. However, Debt - to - assets ratio over the
years is less than 1 which means that most of the company's assets are financed by equity.
The financial leverage ratio tends to increase over the years at a high level of 2.31
in 2017 up 0.45 compared to 2016. A high financial leverage ratio can increase the risk
and degrade the company's business ability, but with this higher risk comes the potential
for higher returns as well.
Interest coverage increased slightly compared to 2016 at 1.34, showing a good
sign when the ability to pay interest on loans of enterprises is more positive. In general,
Interest coverage in 2016, 2017 is greater than 2, which proves that the ability to pay
interest on loans is low.

1.4 Profitability ratios

Gross profit margin = Gross Profit / Revenue
Net profit margin = Net income / Revenue
ROA = Net income / Average total assets
ROE = Net income / Average total equity

    Year
Number Profitability ratios 2016 2017
1 Gross profit margin 58,93% 66,67%
2 Net profit margin 25,63% 31,48%
3 ROA 27,60% 32,45%
4 ROE 64,06% 75,06%

Gross profit margin tends to increase quite strongly over the years from 66.67% to
58.93%, showing that the business is profitable and efficient from invested capital. At the
same time, the ability to control costs effectively is also better than competitors. In 2016,
2017 Gross profit margin can be said to be very high, the business may have good
reasons such as having recovered from the crisis or having adjusted the production line,
finding a new method, the impressive growth of a certain product sold by the enterprise
in the market.
The company's operating profit margin tends to increase slightly from 2018 to
0.87% in 2019 to 1.02% and 2.73% by 2020. We see that operating profit margin grows
more slowly than gross profit margin indicating no improvement in operating cost control
and vice versa.
Net profit margin in 2017 increased by 5.85% compared to 2016 and the growth
for many consecutive years is a good sign that businesses are becoming more and more
efficient when they can generate more profit from one dollar. revenue.

The company's ROA tends to increase gradually in 2016 reaching 27.60% in 2017
is 32.45% This is a sign that the company's capital investment efficiency in 2017 has
increased sharply compared to 2016. that the large increase is due to the increase in the
efficiency of the company's assets, or in other words, the rate of revenue is higher than
the growth rate of assets. From 2018 to 2020, revenue and revenue tend to increase
strongly and steadily over the years, that is, after-tax profit on revenue increases
gradually.

ROE of 2017 compared to 2016 increased quite strongly, in 2016 ROE reached
64.04 % but in 2017 increased by 75.06%. This is a good sign. Enterprises that can
maintain ROE > 20% for 3 years can fully compete in the market. Thus, this business
can have enough competitiveness in the market and do business effectively when the
ROE over the years is over 64%. ROE in 2018 was very high because the company
increased its liabilities. Its capital structure became more risky.