Chapter 3, Problem 1MC

Summary Introduction

To determine: All of listed ratios of Company ECY.

Financial ratios:

It refers to the measures of comparing and investing the relationships between various aspects of financial information.

Explanation of Solution

Given,

Company ECY has recently employed Person DE to provide assistance in the short-term financial planning and financial performance of the company. Person LW the founder of Company ECY has provided the below information to Person DE in order to start his analyses:

Inventory of the company is $6,627,300.

Current assets of the company are $15,823,700.

Current liabilities of the company care $21,320,300.

Sales of the company are $210,900,000.

Total assets of the company are $117,304,900.

Cost of goods sold is $148,600,000.

Accounts receivables of the company are $5,910,800.

Total debt of the company is $\left(\$21,320,300+\$36,400,000\right)=\$57,720,300$

EBIT of the company is $30,229,000.

Interest of the company is $3,791,000.

Net income of the company is $$15,862,800.

Total equity of the company is $59,584,600.

The formula to calculate current ratio is,

$\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}$

Substitute $15,823,700 for current assets and $21,320,300 for current liabilities in the above formula.

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\\ =\frac{\$15,823,700}{\$21,320,300}\\ =0.74\end{array}$

Current ratio of the company is 0.74.

The formula to calculate quick ratio is,

$\text{Quick ratio}=\frac{\text{Current assets}-\text{Inventory}}{\text{Current liabilities}}$

Substitute $15,823,700 for current assets, $6,627,300 for inventory and $21,320,300 for current liabilities.

$\begin{array}{c}\text{Quick ratio}=\frac{\text{Current assets}-\text{Inventory}}{\text{Current liabilities}}\\ =\frac{\$15,823,700-\$6,627,300}{\$21,320,300}\\ =0.43\end{array}$

Quick ratio of the company is 0.43.

The formula to calculate asset turnover ratio is,

$\text{Asset turnover}=\frac{\text{Sales}}{\text{Total assets}}$

Substitute $210,900,000 for sales and $117,304,900 for total assets in the above formula.

$\begin{array}{c}\text{Asset turnover}=\frac{\text{Sales}}{\text{Total assets}}\\ =\frac{\$210,900,000}{\$117,304,900}\\ =1.80\end{array}$

Asset turnover ratio is 1.80.

The formula to calculate inventory turnover ratio is,

$\text{Inventory turnover}=\frac{\text{Cost of goods sold}}{\text{Inventory}}$

Substitute $148,600,000 for cost of goods sold and $6,627,300 in the above formula.

$\begin{array}{c}\text{Inventory turnover}=\frac{\text{Cost of goods sold}}{\text{Inventory}}\\ =\frac{\$148,600,000}{\$6,627,300}\\ =22.42\end{array}$

Inventory turnover ratio is 22.42.

The formula to calculate receivable turnover ratio is,

$\text{Receivable turnover}=\frac{\text{Sales}}{\text{Account receivable}}$

Substitute $210,900,000 for sales and $5,910,800 for accounts receivable in the above formula.

$\begin{array}{c}\text{Receivable turnover}=\frac{\text{Sales}}{\text{Account receivable}}\\ =\frac{\$210,900,000}{\$5,910,800}\\ =35.68\end{array}$

Receivable turnover ratio is 35.68.

The formula to calculate debt ratio is,

$\text{Debt ratio}=\frac{\text{Total debt}}{\text{Total assets}}$

Substitute $57,720,300 for total debt and $117,304,900 for total assets in the above formula.

$\begin{array}{c}\text{Debt ratio}=\frac{\text{Total debt}}{\text{Total assets}}\\ =\frac{\$57,720,300}{\$117,304,900}\\ =0.49\end{array}$

Debt ratio of the company is 0.49.

The formula to calculate debt equity ratio is,

$\text{Debt equity ratio}=\frac{\text{Total debt}}{\text{Total equity}}$

Substitute $57,720,300 for total debt and $59,584,600 for total equity in the above formula.

$\begin{array}{c}\text{Debt equity ratio}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{\$57,720,300}{\$59,584,600}\\ =0.97\end{array}$

Debt equity ratio of the company is 0.97.

The formula to calculate equity multiplier is,

$\text{Equity multiplier}=\frac{\text{Total asset}}{\text{Total equity}}$

Substitute $117,304,900 for total asset and $59,584,600 for total equity in the above formula.

$\begin{array}{c}\text{Equity multiplier}=\frac{\text{Total asset}}{\text{Total equity}}\\ =\frac{\$117,304,900}{\$59,584,600}\\ =1.94\end{array}$

Equity multiplier is 1.97.

The formula to calculate interest coverage ratio is,

$\text{Interest coverage}=\frac{\text{EBIT}}{\text{Interest}}$

Substitute $30,229,000 for EBIT and $3,791,000 for interest in the above formula.

$\begin{array}{c}\text{Interest coverage}=\frac{\text{EBIT}}{\text{Interest}}\\ =\frac{\$30,229,000}{\$3,791,000}\\ =7.97\end{array}$

Interest coverage ratio of the company is 7.97.

The formula to calculate profit margin is,

$\text{Profit margin}=\frac{\text{Net income}}{\text{Sales}}\times 100$

Substitute $15,862,800 for net income and $210,900,000 in the above formula.

$\begin{array}{c}\text{Profit margin}=\frac{\text{Net income}}{\text{Sales}}\times 100\\ =\frac{\$15,862,800}{\$210,900,000}\times 100\\ =7.52\%\end{array}$

Profit margin is 7.52%

The formula to calculate return on asset is,

$\text{Return on asset}=\frac{\text{Net income}}{\text{Total assets}}\times 100$

Substitute $15,862,800 for net income and $117,304,900 for total asset.

$\begin{array}{c}\text{Return on asset}=\frac{\text{Net income}}{\text{Total assets}}\times 100\\ =\frac{\$15,862,800}{\$117,304,900}\times 100\\ =13.52\%\end{array}$

Return on asset is 13.52%.

The formula to calculate return on equity is,

$\text{Return on equity}=\frac{\text{Net income}}{\text{Total equity}}\times 100$

Substitute $15,862,800 for net income and $59,584,600 for total equity in the above formula.

$\begin{array}{c}\text{Return on equity}=\frac{\text{Net income}}{\text{Total equity}}\times 100\\ =\frac{\$15,862,800}{\$59,584,600}\times 100\\ =26.62\%\end{array}$

Return on equity of the company is 26.62%.

Conclusion

Thus, the financial ratios help in comparing and investing the relationships between various aspects of financial information.