Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.
| Balance Sheet (Millions of $) | 2021 | |||
| Assets | ||||
| Cash and securities | $ | 4,900 | ||
| Accounts receivable | 17,500 | |||
| Inventories | 19,600 | |||
| Total current assets | $ | 42,000 | ||
| Net plant and equipment | 28,000 | |||
| Total assets | $ | 70,000 | ||
| Liabilities and Equity | ||||
| Accounts payable | $ | 23,973 | ||
| Accruals | 15,327 | |||
| Notes payable | 7,000 | |||
| Total current liabilities | $ | 46,300 | ||
| Long-term bonds | 9,000 | |||
| Total liabilities | $ | 55,300 | ||
| Common stock | 4,410 | |||
| 10,290 | ||||
| Total common equity | $ | 14,700 | ||
| Total liabilities and equity | $ | 70,000 | ||
| Income Statement (Millions of $) | 2021 | |||
| Net sales | $ | 126,000 | ||
| Operating costs except depreciation | 117,180 | |||
| Depreciation | 2,240 | |||
| Earnings before interest and taxes (EBIT) | $ | 6,580 | ||
| Less interest | 960 | |||
| Earnings before taxes (EBT) | $ | 5,620 | ||
| Taxes (25%) | 1,405 | |||
| Net income | $ | 4,215 | ||
| Other data: | ||||
| Shares outstanding (millions) | 500.00 | |||
| Common dividends (millions of $) | $1,475.25 | |||
| Int. rate on notes payable & L-T bonds | 6% | |||
| Federal plus state income tax rate | 25% | |||
| Year-end stock price | $84.30 |
What is the firm's market-to-book ratio? Do not round your intermediate calculations.
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