Homework Answers
Financial ratios are grouped into :
1. Liquidity ratios
2. Leverage ratios
3. Efficiency ratios
4. Profitability ratios
1. Liquidity Ratios
Liquidity ratios are used to measure company’s ability to repay short- term obligations and long-term obligations. Liquidity ratios are :
- Current ratio = Current assets / Current liabilities
- Acid-test ratio = Current assets – Inventories / Current liabilities
- Cash ratio = Cash and Cash equivalents / Current Liabilities
- Operating cash flow ratio = Operating cash flow / Current liabilities
2. Leverage Ratios
Leverage ratios are used to measure the amount of capital that comes from debt. Leverage ratios are :
- Debt ratio = Total liabilities / Total assets
- Debt to equity ratio = Total liabilities / Shareholder’s equity
- Interest coverage ratio = Operating income / Interest expenses
3. Efficiency Ratios
Efficiency ratios are used to measure a company's utilisation of assets and resources. Efficiency ratios are :
- Asset turnover ratio = Net sales / Average total assets
- Inventory turnover ratio = Cost of goods sold / Average inventory
4. Profitability Ratios
Profitability ratios are used to measure a company's ability to generate income corresponding to balance sheet assets, revenue, equity and operating costs. Profitability ratios are :
- Gross margin ratio = Gross profit / Net sales
- Operating margin ratio = Operating income / Net sales
- Return on assets ratio = Net income / Total assets
- Return on equity ratio = Net income / Shareholder’s equity
FINANCIAL RATIOS FOR THE YEAR 2019 :
1. Liquidity Ratios
- Current ratio = 1.76
- Acid-test ratio = 0.88
- Cash ratio = 0.17
- Operating cash flow ratio = 1.28
2. Leverage Ratios
- Debt ratio = 0.56
- Debt to equity ratio = 1.29
- Interest coverage ratio = 5.28
3. Efficiency Ratios
- Asset turnover ratio = 1.55
- Inventory turnover ratio = 4
4. Profitability Ratios
- Gross margin ratio = 0.35
- Operating margin ratio = 0.10
- Return on assets ratio = 0.07
- Return on equity ratio = 0.16
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full answer
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