Chapter 17, Problem 12E

To determine

Introduction:

Ratio Analysis

• Ratio analysis is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

The key metrics mentioned above include the following:

• Total Asset Turnover – A measure of the correlation between the Total assets employed and the turnover of the business.

• It seeks to evaluate the volume of sales in relation to the assets employed. It gives an indication of the sales in relation to the investment made in the assets and overall capital contribution to the company in the form of Assets.

$\text{Asset Turnover Ratio = Turnover / Assets x 100}$

• Return on Total Assets – A measure of the total returns on investment in the form of assets. It is an indicator of the profitability of the assets employed by the business.

• It seeks to measure the return earned on the total assets i.e. the resources employed by the business to directly or indirectly increase revenue or reduce costs.

$\text{Return on Total Assets = Net Income / Assets x 100}$

• Net Profit Margin – It is a measure of the total Profit earned from sales after deduction of operating expenses, selling and distribution expenses and other indirect costs.

• It is often the most sought after financial measure to evaluate profitability since it gives a clear indication of the Profit / Loss of the company at the end of the reporting period.

$\text{Net Profit Margin = Net Profit / Turnover x 100}$

To Prepare:

Report comparing Roak and Clay companies highlighting their ability to meet current obligations and use current assets efficiently