Question

What are the answers to these questions, and how do I answer them?

Below is are balance and income numbers for three companies. Answer the questions below. ​

		1		2		3
		Year 1	Year 2	Year 1	Year 2	Year 1	Year 2
Revenue		5674	5054	176896	124959	179083	186506
COGS		3442	3066	144924	102374	144249	150228
Gross Profit		2232	1988	31972	22585	34834	36277
EBITDA		1470	658	7962	2712	15990	20527
Taxes		510	218	6522	325	4309	11615
Net Income		960	440	1440	2387	11681	8912
Total Assets		5255	4681	275936	194921	244587	254725
Equity		3084	3235	13442	40922	89999	134333
Current Assets		3145	1550	62923	23413	91387	144135
Current Liabilities		873	289	53604	6438	85373	48307
Inventory		221	513	10271	2812	13799	81558
Long-Term Debt		1298	1156	208890	147560	69215	72084

• ● The balance sheet items may not balance perfectly (they may be out ~$1) due to rounding error.

• ● USE EXCEL to calculate the solutions and do the math – calculators may throw off your rounding

• ● Submit percentages as the percentage followed by two decimals. A number that appears as .04567 in excel should be

  submitted as 4.57%.

• ● Responses will be marked correct if they are within 5% of the answer I calculated in Excel

  (Questions on next page)

1. Which company has the best liquidity (highest current ratio) in Year 2?

2. Which company does the best job generating profits for shareholders in Year 2? (ROE)

3. Which company does the best job generating profits with its total investment in Year 2? (ROA)

4. Which company is the most leveraged (high long-term debt to equity) in Year 2?

5. Which company has the biggest current threat of being illiquid (lowest current ratio) in Year 2?

6. Which company saw the biggest increase in its net profit margin from Year 1 to Year 2 (or smallest decrease if NI all

   negative)?

7. What is company 2's ROA in Year 2?

8. What is company 1's ROA in Year 1?

9. What is company 3's ROA in Year 2?

10. Which company has the highest gross margin in Year 2?

11. What is company 1's quick ratio in Year 1?

12. What is company 2's current ratio in Year 2?

13. What is company 3's net margin in Year 2?

14. What is company 2's inventory turnover in Year 2?

15. What is company 3's long-term debt to assets ratio in Year 1?

Answer 1

Current Ratio :

The Current Ratio compares all of a company's current assets to its current liabilities. Current Assets means cash and other assets which will turn into cash in a year or less. Current liabilities are those liabilities that will be paid in a year or less.

Formula: Current Ratio = Current Assets / Current Liabilities

Calculation of Companies having the Highest Current Ratio in Year - 2:

For Company -1: Current Ratio = 1550/289 = 5.36

For Company -2: Current Ratio = 23,413/6438 = 3.64

For Company -3: Current Ratio = 144,135/48,307 = 2.98

From the above calculation it is clear that Company - 1 is having highest liquidity ratio as it is having $ 5.63 as current asset for every $1 of current liability.

Return on Equity (ROE):

Return on Equity measures how effectively management is using a company's assets to create profits. It is calculated by diving Net Income by Shareholders' Equity.

Formula: Return on Equity = Net Income/Average Shareholders' Equity  

where, Average Shareholders' Equity = (Equity at the start of the Year+Equity at the end of the Year)/2.

Calculation of Companies having the Highest Return on Equity in Year - 2:

For Company -1: Return on Equity = 440/((3,084+3,235)/2) = 13.93%

For Company -2: Return on Equity = 2,387/((13,442+40,922)/2) = 8.78%

For Company -3: Return on Equity = 8,912/((89,999+134,333)/2) = 7.95%

From the above calculation it is clear that Company - 1 is having highest Return on Equity of 13.93%.

Return on Assets (ROA):

Return on Assets measures how effectively a company is utilizing its assets by calculating the percentage of profit a company earns in relation to its total assets.

Formula: Return on Assets = Net Income / Average Total Assets

where, Average Total Assets = (Total Assets at the start of the Year+Total Assets at the end of the Year)/2

Calculation of Companies having the Highest Return on Assets in Year - 2:

For Company -1: Return on Assets = 440/((5,255+4,681)/2) = 8.86%

For Company -2: Return on Assets = 2,387/((275,936+194,921)/2) = 1.01%

For Company -3: Return on Assets = 8,912/((244,587+254,725)/2) = 3.57%

From the above calculation it is clear that Company - 1 is having highest Return on Equity of 8.86%.

Debt to Equity Ratio:

Debt to Equity Ratio compares the company's total liabilities to its shareholder's equity and can be used to evaluate how much leverage a company is using. It is calculated by dividing the company's' total liabilities by its shareholder equity.

Formula: Debt to Equity Ratio = Total Liabilities / Total Shareholders' Equity

Calculation of Companies having the Highest Leverage i.e. Debt to Equity Ratio in Year - 2:

For Company -1: Debt to Equity Ratio = (289+1,156)/3235 = 0.45

For Company -2: Debt to Equity Ratio = (6,438+147,560)/40,922 = 3.76

For Company -3: Debt to Equity Ratio = (48,307+72,084)/134,333 = 0.90

From the above calculation, it is clear that Company - 2 is having highest leverage i.e. Debt to Equity Ratio of 3.76 which means that for every $ 1 of equity there is debt of $ 3.76.

Note: As per Chegg Policy we are allowed to answer maximum 4 sub-parts of the question.