Chapter 17, Problem 4BTN

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:

• 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.

$\text{Accounts Receivable Turnover Ratio = Turnover / Accounts Receivable}$

• 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.

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

• 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.

$\text{Current Ratio = Current Assets / Current Liabilities}$

• 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.

$\text{Return on Shareholders' Equity = Net Income / Equity Share Capital x 100}$

To Determine:

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