Final Presentation
ksjmksessions
Week4AssignmentFINAL.docxPROJECT FINANCIAL RATIOS 10
Project Financial Ratios
Kevin Sessions
BUS 368 Venture Capital & Banking
Edward Crawford
Mar 7, 2022
Introduction
A sustainable business requires effective financial management. Calculation of financial ratios help to determine a company’s financial position (Kadim et al., 2020). I have calculated various financial ratios based on the financial statements. Some of the financial ratios I have calculated include management efficiency ratio, liquidity ratio, profitability ratio, and company’s leverage ratio.
Financial Ratios
1. Liquidity ratio
a. Current ratio
Current ratio = current assets / current liabilities.
Current ratio (201y) - $2,334,000 / $2,444,900
Current ratio = 0.95
Current ratio (201x) - $2,179,000 / $2,165,847
Current ratio = 1
b. Quick ratio
Quick ratio = (current assets – inventory) / current liabilities
Quick ratio (201y) = ($2,262,000 - $650, 000) / $2,444,900
Quick ratio = 0.66
Quick ratio (201x) = ($1,792,000 - $650, 000) / $2,165,847
Quick ratio = 0.53
c. Cash ratio
Cash ratio = (cash + cash equivalence) / total current liabilities
Cash ratio (201y) = $190,000 / $2,444,900
Cash ratio = 0.08
Cash ratio (201x) = $170,000 / $779,000
Cash ratio = 0.22
2. Leverage ratio
a. Debt to equity ratio
Debt to equity ratio = total liabilities / total shareholder equity
Debt to equity ratio (201y) = $2,444,900 / $2,690,000
Debt to equity ratio – 0.91
Debt to equity ratio (201x) = $2,165,847 / $2,790,000
Debt to equity ratio – 0.78
b. Equity multiplier
Equity multiplier = total assets / total shareholder’s equity
Equity multiplier (201y) = $2,334,000 / $2,690,000
Equity multiplier – 0.87
Equity multiplier (201x) = $2,179,000 / $2,790,000
Equity multiplier – 0.78
c. Debt to capitalization ratio
Debt to capital ratio = debt / (debt +shareholders equity)
Debt to equity ratio (201y) = $2,444,900 / $5,134,900
Debt to equity ratio – 0.48
Debt to equity ratio (201x) = $2,165,847 / $4,955,847
Debt to equity ratio – 0.44
d. Degree of financial ratio
Degree of financial ratio = %change in EPS / % change in EBIT
EPS = net income / number of stocks
Degree of financial ratio (201y) = 129.45 / $325,855
Degree of financial ratio- 3.97%
Degree of financial ratio (201x) = 95.75 /$235,855
Degree of financial ratio – 0.04%
e. Consumer leverage ratio
Consumer leverage ratio = total household debt / personal disposable income
Consumer leverage ratio (201y) = $2,444,900 / $103,516
Consumer leverage ratio – 23.60
Consumer leverage ratio (201x) = $2,165,847 / $76,606
Consumer leverage ratio – 28.27
f. Debt to EBITDA ratio
Debt to EBITDA ratio = total debt / EBITDA
Debt to EBITDA ratio (201y) = $2,444,900 / $325,855
Debt to EBITDA ratio – 7.5
Debt to EBITDA ratio (201x) = $2,165,847 / $235,855
Debt to EBITDA ratio – 9.18
g. Debt to ENITDAX RATIO
h. Interest coverage ratio
Interest coverage ratio = EBIT / interest expenses
Interest coverage ratio (201y) = $325,855 / $48,905
Interest coverage ratio – 6.66
Interest coverage ratio (201x) = $235,855 / $28,905
Interest coverage ratio- 8.15
i. Fixed charge coverage ratio
Fixed charge coverage ratio = (EBIT + lease payment) / (interest payment + lease payment)
Lease payment = revenue – operating income – Cost of Goods Sold 1292948
Fixed charge coverage ratio = ($325,855 + $1,267,093) / ($48,905 + $1,267,093)
Fixed charge coverage ratio –1.3×
Fixed charge coverage ratio = ($235,855 + $1,057,093) / ($28,905 + $1,057,093)
Fixed charge coverage ratio – 1.20 ×
3. Management efficiency ratio
a. Inventory turnover ratio
Inventory turnover ratio = Cost of Goods Sold / inventory
Inventory turnover ratio (201y) = $5,300,807 / $650,000
Inventory turnover ratio – 8.16
Inventory turnover ratio (201x) = $4,600,807 / $650,000
Inventory turnover ratio- 7.07
b. Asset turnover ratio
Total asset turnover = total sales / total assets
Asset turnover (201y) - $6,893,755 / $2,262,000
Total asset turnover = 3.05x
Asset turnover (201x) - $5,893,755 / $1,792,000
Total asset turnover = 3.29x
Overall asset turnover (201x) – 3.29x
c. Fixed asset turnover
Fixed asset turnover = net sales / (fixed asset – depreciation) 1595727
Fixed asset turnover (201y) = $6,893,755 / ($2,100,000 - $364,273)
Fixed asset turnover – 3.97
Fixed asset turnover (201x) = $5,893,755 / ($1,950,000 -$354,273)
Fixed asset turnover – 3.69
d. Asset turnover ratio
Asset turnover ratio = total sales revenue / average annual assets
Asset turnover ratio (201y) = $6,893,755 / $2,334,000
Asset turnover ratio – 2.95
Asset turnover ratio (201x) = $5,893,755 / $2,179,000
Asset turnover ratio – 2.70
e. Account payable turnover
Account payable turnover ratio (201y) = total purchases / average account payable
Total purchases = (ending inventory + cost of goods) – beginning inventory
($650,000 + $6,893,755) - $650,000 = $6,893,755
Account payable turnover ratio = $6,893,755 / ($500,000 / 2)
Account payable turnover ratio – 27.57
1. Profitability ratio
Return on equity =net income / shareholder equity
Return on equity (201y) = $103,516 / $2,690,000
Return on equity – 0.04
Return on equity (201x) = $76,606 / $2,790,000
Return on equity – 0.03
b. Price to earnings ratio
Price to earnings ratio = share price / earnings per share
Price to earnings ratio (201y) = 129.23 / 112.5
Price to earnings ratio – 1.15
Price to earnings ratio (201x) = 95.75 / 112.5
Price to earnings ratio – 0.85
c. Gross profit
Gross profit = (revenue – cost of goods sold) / revenue* 100
Gross profit (201y) = ($6,893,755 - $5,300,807) / $6,893,755 * 100
Gross profit – 23.10 %
Gross profit (201x) = ($5,893,755 - $4,600,807) / $5,893,755 * 100
Gross profit – 18.75 %
d. Net profit
Net profit = (net profit / revenue) * 100
Net profit (201y) = $103,516 / $265,426
Net profit – 38%
Net profit (201x) = ($76,606 / $196,426) * 100
Net profit – 38%
e. Return on assets
Return on assets = net income / total assets
Return on assets (201y) = $103,516 / $2,334,000
Return on assets – 0.05
Return on assets (201x) = $76,606 / $2,179,000
Return on assets – 0.04
f. Return on capital employed
Return on capital employed = EBIT / capital employed
Capital employed = total assets – current liabilities
Return on capital employed (201y) = $325,855 / ($2,334,000 -$951,104)
Return on capital employed – 0.24
Return on capital employed (201x) = $235,855 / ($2,179,000 -$779,000)
Return on capital employed – 0.17
Conclusion
By calculating the company’s financial ratio(s), I have determined that the company is solvent, and investors can purchase shares and expect returns on their investment. The company has a high inventory turnover of 8.19. This indicates that the company achieves efficiency in purchase and production. Additionally, the company stocking is efficient and does not experience selling issues. Lastly, the company’s return on equity is -0.04. This indicates that the company is making more profits, thus having long-term financial viability (Zorn et al., 2018). However, the company’s cash ratio is less than 0.22, which is less than one. This means that there are more current liabilities than cash and indicates the company has insufficient cash to pay short-term debts.
References
Kadim, A., Sunardi, N., & Husain, T. (2020). The modeling firm's value based on financial
ratios, intellectual capital and dividend policy. Accounting, 6(5), 859-870.
Zorn, A., Esteves, M., Baur, I., & Lips, M. (2018). Financial ratios as indicators of
economic sustainability: A quantitative analysis for Swiss dairy farms. Sustainability, 10(8), 2942.
