Compute The Following 13 Ratios For Bo ✓ Solved

Compute The Following 13 Ratios For Bo

Calculate 13 financial ratios for both JJ's Jammers and Smith Corporation using provided financial data. Round profit margin, return on assets, return on equity, and debt to total assets to two decimal places as percentages. All other calculations should be rounded to two decimal places. Additionally, provide explanations for what each ratio indicates regarding each company's financial health and performance.

Sample Paper For Above instruction

Financial ratios are crucial tools for analyzing a company's financial health, efficiency, and profitability. The ratios computed for JJ's Jammers and Smith Corporation will offer insights into their operational efficiency, liquidity, leverage, and profitability. This paper presents the calculations of 13 key ratios for both companies, followed by interpretive explanations that delineate what each ratio indicates about their respective financial condition.

1. Profit Margin

The profit margin is calculated as EAT divided by net sales (credit sales), expressed as a percentage. For JJ's Jammers, it measures how effectively the company converts sales into profit, considering expenses and taxes. For Smith, it indicates profitability efficiency in a different business context.

JJ's Jammers: (EAT / Credit Sales) 100 = (-$8,000 / $1,250,000) 100 ≈ -0.64%

Smith: (EAT / Credit Sales) 100 = (-$295,000 / $1,000,000) 100 ≈ -29.50%

2. Return on Assets (ROA)

ROA measures how efficiently a company uses its assets to generate earnings. It's calculated as EAT divided by total assets, expressed as a percentage.

JJ's Jammers: (-$8,000 / $500,000) * 100 ≈ -1.60%

Smith: (-$295,000 / $750,000) * 100 ≈ -39.33%

3. Return on Equity (ROE)

ROE indicates how effectively a company uses shareholders' equity to generate profit. It is calculated as EAT divided by total stockholders' equity, expressed as a percentage.

JJ's Jammers: (-$8,000 / $320,000) * 100 ≈ -2.50%

Smith: (-$295,000 / $47,500) * 100 ≈ -621.05% (indicates severe loss relative to equity)

4. Receivables Turnover

This ratio shows how many times a company collects its average accounts receivable during a period. Calculated as credit sales divided by average accounts receivable.

JJ's Jammers: $1,250,000 / $80,000 ≈ 15.63

Smith: $1,000,000 / $70,000 ≈ 14.29

5. Average Collection Period

This measures the average number of days to collect receivables, calculated as 360 / receivables turnover.

JJ's Jammers: 360 / 15.63 ≈ 23.03 days

Smith: 360 / 14.29 ≈ 25.19 days

6. Inventory Turnover

Indicates how often inventory is sold and replaced. Calculated as COGS divided by average inventory.

JJ's Jammers: $750,000 / $50,000 = 15.00

Smith: $600,000 / $75,000 = 8.00

7. Fixed Asset Turnover

Shows how effectively fixed assets generate sales. Calculated as credit sales divided by net plant and equipment.

JJ's Jammers: $1,250,000 / $350,000 ≈ 3.57

Smith: $1,000,000 / $250,000 = 4.00

8. Total Asset Turnover

Measures efficiency in using total assets to generate sales, calculated as credit sales divided by total assets.

JJ's Jammers: $1,250,000 / $500,000 = 2.50

Smith: $1,000,000 / $750,000 ≈ 1.33

9. Current Ratio

Assesses liquidity by dividing current assets by current liabilities.

JJ's Jammers: ($20,000 + $80,000 + $50,000) / $100,000 = $150,000 / $100,000 = 1.50

Smith: ($35,000 + $7,500 + $70,000 + $75,000) / $75,000 = $182,500 / $75,000 ≈ 2.43

10. Quick Ratio

Measures immediate liquidity by excluding inventory from current assets.

JJ's Jammers: ($20,000 + $80,000) / $100,000 = $100,000 / $100,000 = 1.00

Smith: ($35,000 + $7,500 + $70,000) / $75,000 = $112,500 / $75,000 = 1.50

11. Debt to Total Assets

Evaluates the proportion of assets financed by debt. Calculated as total liabilities divided by total assets.

JJ's Jammers: ($100,000 + $80,000) / $500,000 = $180,000 / $500,000 = 0.36 or 36%

Smith: ($75,000 + $210,000) / $750,000 = $285,000 / $750,000 = 0.38 or 38%

12. Times Interest Earned (Interest Coverage)

Indicates how many times operating income covers interest expense. Calculated as EBIT divided by interest expense.

JJ's Jammers: -$257,000 / $8,000 = -32.13 (negative indicates loss)

Smith: -$274,000 / $21,000 ≈ -13.05 (negative indicates loss)

13. Fixed Charge Coverage

Measures a company's ability to cover fixed charges, including lease payments, with operating income. Calculated as EBIT plus lease payments, divided by interest plus lease payments.

JJ's Jammers: (-$257,000 + $7,000) / ($8,000 + $7,000) ≈ -$250,000 / $15,000 ≈ -16.67

Smith: (-$274,000 + $7,000) / ($21,000 + $7,000) ≈ -$267,000 / $28,000 ≈ -9.54

Discussion of Ratios Interpretations

These ratios collectively provide a comprehensive view of each company's financial standing. JJ's Jammers shows marginal liquidity with a current ratio of 1.50 and a quick ratio of 1.00, indicating it can meet short-term obligations but has limited buffer. Its negative profit margins and negative ROE reflect operational challenges. Conversely, Smith demonstrates stronger liquidity and higher asset efficiency, but its significantly negative profitability ratios suggest ongoing losses. Leverage ratios indicate both companies are financed with a substantial proportion of debt, though Smith has a slightly higher debt ratio. The interest coverage ratios, being negative in both cases, highlight difficulties in generating sufficient earnings to comfortably cover interest expenses, signaling financial distress and high leverage risks. These ratios need to be contextualized with industry standards for more accurate assessments.

Annotated Bibliography

  • Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management (15th ed.). Cengage Learning.
  • This comprehensive textbook covers the fundamental concepts of financial ratio analysis, providing detailed explanations and practical examples. Its authoritative approach makes it a key resource for understanding financial metrics and their implications for businesses.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial Statement Analysis (11th ed.). McGraw-Hill Education.
  • This book offers in-depth insights into interpreting financial statements through various ratios. It emphasizes critical analysis and equips readers with the skills to assess financial health effectively.
  • Higgins, R. C. (2012). Analysis for Financial Management (10th ed.). McGraw-Hill.
  • Higgins discusses ratio analysis within the broader context of financial decision-making, emphasizing practical application and industry comparisons, making it valuable for students and practitioners alike.
  • Koller, T., Goedhart, M., & Wessels, D. (2015). Valuation: Measuring and Managing the Value of Companies. Wiley.
  • This book links ratio analysis with company valuation, illustrating how financial metrics influence investment decisions. Its real-world case studies enhance understanding of ratios’ strategic importance.
  • Penman, S. H. (2012). Financial Statement Analysis and Security Valuation. McGraw-Hill Higher Education.
  • Penman integrates financial ratio analysis with valuation techniques, offering a nuanced perspective on interpreting financial data for investment evaluation.

References

  • Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management. Cengage Learning.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial Statement Analysis. McGraw-Hill Education.
  • Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill.
  • Koller, T., Goedhart, M., & Wessels, D. (2015). Valuation: Measuring and Managing the Value of Companies. Wiley.
  • Penman, S. H. (2012). Financial Statement Analysis and Security Valuation. McGraw-Hill Higher Education.
  • White, G. I., Sondhi, A. C., & Fried, D. (2003). The Analysis and Use of Financial Statements. Wiley.
  • Glautier, M., & Underdown, B. (2010). Accounting Theory and Practice. Pearson Education.
  • Penman, S. H. (2010). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.
  • Samuels, J., & Jones, P. (2017). Financial Ratios for Executives: How to Assess Company Strength, Fix Problems, and Make Better Decisions. McGraw-Hill.
  • Fraser, L. M., & Ormiston, A. (2010). Understanding Financial Statements. Pearson Education.

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