Based on the financial information provided, calculate the following ratios and explain their purpose:
Current Ratio = Current Assets / Current Liabilities
12/31/2010
= 1,550.00/535.00
=2.89
12/31/2009
=1,330.00/425.00
=3.12
Inventory Turnover Ratio = Cost of goods sold / (Beginning inventory + Ending Inventory) / 2
12/31/2010
=2,200/750 /2
=2,200/375
=5.86
12/31/2009
=2100/755 /2
=2100/377.5
=5.56
Accounts Receivable Turnover Ratio= Net Credit Sales / Average Net Accounts Receivable
12/31/2010
=3500/425
=8.23
12/31/2009
=3200/425
=7.5
Debt to Equity Ratio = Total Liabilities / Total Shareholders’ equity
12/31/2010
=535/1415
=.37
12/31/2009
=425/1350
=.31
Return on Assets Ratio = Net Income / Average total Assets
12/31/2010
=683/2700
=25.2%
12/31/2009
=592/2700
=21.9%
Asset Turnover Ratio = Net Sales / Average Total Assets
12/31/2010
=3500/2700
=1.29
12/31/2009
=3200/2700
=1.18
Return on Equity Ratio = Net Income – Preferred Dividends / Average common Shareholders’ Equity
12/31/2010
=683-25/4000
=.1645
12/31/2009
=592/4000
=.148
Profit Margin Ratio = Net Income / Net Sales
12/31/2010
=683/3500
=.195
12/31/2009
=592/3200
=.185
Price-Earnings Ratio = Market Price per common share / Earnings per share
=40.00/6.58
=6.079
Dividend Yield Ratio = Dividend per share / Market price per share
=2.60/40.00
=.065
Ratio Analysis
Describe how a bank lending officer might use ratio analysis. Select five ratios that would be most useful for the purpose and explain the rationale for your selection.
Current Ratio - helps creditors determine if a company can meet its short-term obligations. Bank lenders use this ratio to help better determine their current and previous history on short-term obligations. For example, short term loan.
Debt to Equity - The debt/equity ratio is a leverage ratio that represents what amount of debt and equity is being used to finance a company's assets. If a company’s debt is too high or debt to equity ratio is too high then it would tell the lender that the company has a lot of financing or debt into its assets.
Return on Assets – Measures the company’s success in using its assets to earn income for owners and creditors. Profits or income for a company means money that can be paid to the owners and/or creditors for debt that is owed.
Asset Turnover – measures how efficiently a company uses its assets. Some creditors and/or lenders will audit a company to determine if a company is using all of its assets to achieve as much profit as possible.
Profit Margin – To measure the amount from each dollar of sales that is bottom-line profit. The reason for my selection of this ratio is to show lenders how much net income is actually coming in after all expenses.
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