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: Accounts receivable turnover − A measure of the relation between the turnover and accounts receivable measured in number of times. It seeks to measure the relation of the credit sales in proportion to the total turnover and is an indicator of how much of the receivables are blocked due to credit sales. 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. Current Ratio − It is a measure of the relation between the current assets and current liabilities and seeks to measure the ability of the business to fulfill its short term obligations. Current assets are assets that are convertible to cash within a period of one year or less. Current liabilities are liabilities that need to be discharged within a period of one year or less. Return on Shareholders' Equity − A measure of the total earnings of the equity share holders in proportion to the share capital introduced by them. It seeks to measure the proportion of the total earnings in relation to the investment made and is an effective way to evaluate how profitable the investment in the company is. Analysis of a company's financial Statements from an investment point of view

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Chapter 17, Problem 2BTN

To determine

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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:

Accounts receivable turnover − A measure of the relation between the turnover and accounts receivable measured in number of times.

It seeks to measure the relation of the credit sales in proportion to the total turnover and is an indicator of how much of the receivables are blocked due to credit sales.

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.

Current Ratio − It is a measure of the relation between the current assets and current liabilities and seeks to measure the ability of the business to fulfill its short term obligations.

Current assets are assets that are convertible to cash within a period of one year or less. Current liabilities are liabilities that need to be discharged within a period of one year or less.

Return on Shareholders' Equity − A measure of the total earnings of the equity share holders in proportion to the share capital introduced by them.

It seeks to measure the proportion of the total earnings in relation to the investment made and is an effective way to evaluate how profitable the investment in the company is.

Analysis of a company's financial Statements from an investment point of view

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Selected comparative financial statements of Korbin Company follow. Sales KORBIN COMPANY Comparative Income Statements For Years Ended December 31 2021 2020 $ 512,008 $ 392,240 2019 $ 272,200 Cost of goods sold 308,229 245,542 174,208 Gross profit 203,779 146,698 97,992 Selling expenses 72,705 54,129 35,930 Administrative expenses 46,081 34,517 22,593 Total expenses 118,786 88,646 58,523 Income before taxes .84,993 58,052 39,469 Income tax expense 15,809 11,901 8,012 Net income $ 69,184 $ 46,151 $ 31,457 KORBIN COMPANY Comparative Balance Sheets Assets Current assets Long-term investments Plant assets, net Total assets Liabilities and Equity Current liabilities Common stock Other paid-in capital Retained earnings December 31 2021 2020 2019 $ 54,370 0 $ 36,390 600 $ 48,645 3,870 99,436 90,776 53,339 Total liabilities and equity $ 153,806 $ 127,766 $ 105,854 $ 22,456 $ 19,037 $ 18,524 68,000 68,000 50,000 8,500 8,500 5,556 54,850 32,229 31,774 $ 153,806 $ 127,766 $ 105,854