PERFORMANCE TASK IN BUSINESS FINANCE

FINANCIAL ANALYSIS

A. Liquidity Ratios

1. Working Capital = Current Assets - Current Liabilities

Year Working Capital

2020 53,000-25,000 = 28,000

2019 33,500-13,500 = 20,000

2. Current Ratio = Current Assets

Current Liabilities
Year Current Ratio

2020 53,000
25,000

= 2.12 : 1.00

2019 33,500
13,500

= 2.48 : 1.00

3. Acid Test or Quick Ratio = Quick Assets

Current Liabilities
Year Acid Test or Quick Ratio

2020 45,500
25,000

= 1.82 : 1.00
 2019 30,000

13,500

= 2.22 : 1.00

4. Accounts Receivable Turnover = Net Credit Sales

Average Accounts Receivable
Year Accounts Receivable Turnover

2020 Not Applicable

2019 Not Applicable

5. Inventory Turnover = Cost of Sales

Average Inventory

6. Operating Cycle = Collection Period (days) + Average Age of Inventory

(Days)

B. Solvency or Stability Ratios

1. Times Interest Earned Ratio = Net Profit before Interest and Income Taxes
Annual Interest Expense
Year Times Interest Earned Ratio

202 20,925
0 10,500

= 2 times

201 Not applicable

9
 The times interest earned ratio cannot be
computed for 2019 since the interest
expense for the year is zero

2. Debt-Service Coverage Ratio = Net Profit before Interest Payments on

Principal and Interest
Year Debt-Service Coverage Ratio

202 20,925
0 (59,000 − 50,000) + 10,500

= 1 time

201 Not applicable

9 No interest and principal payments

3. Debt Ratio = Total Liabilities

Total Assets
Year Debt Ratio

2020 84,000
138,000

= 60.87%

2019 63,500
83,500

= 76.05%

4. Equity Ratio = Owner’s Equity

Total Assets
Year Equity Ratio
 2020 54,000
138,000

= 39.13%

2019 20,000
83,500

= 23.95%

5. Debt-to-Equity Ratio = Total Debt

Owner’s Equity
Year Debt-to-Equity Ratio

2020 84,000
54,000

= 155.56%

2019 63,500
20,000

= 317.5 %

This means that the company is borrowing money for more of its funding, which
puts the company to possible danger if debt levels are too high.

6. Debt-to-Capitalization Ratio = Total Debt

Total Debt + Equity
Year Debt to Capitalization Ratio

2020 84,000
(84,000 + 54,000)

= 0.61 : 1.00
 2019 63,500
(63,500 + 20,000)

= 0.76 : 1.00

C. Profitability Ratios

1. Gross Profit Margin Ratio = Gross Profit

Net Revenue or Net Sales

This is not applicable because this is not a merchandising business.

2. Return on Sales or Net Profit Margin Ratio = Net Profit after Taxes Net
Revenue or Net Sales
Year Return on Sales or Net Profit Margin Ratio

2020 10,425
200,500

= 5.19 % or 5.20 %

2019 Not applicable since the year incurred

a net loss.

3. Return on Assets = Net Profit After Taxes

Average Total Assets
Year Return on Assets

2020 10,425
110,750

= 9.41%

4. Return on Equity= Net Profit after Taxes

Average Owner’s Equity
Year Return on Equity
2020 10,425
37,000

= 28.18%