Financial Ratio Assignment 283370
Financial Ratio Assignment
Students have a responsibility to maintain the academic integrity of DeVry University and its Keller Graduate School of Management, and to meet the highest standards of academic conduct as stated in the Student Handbook. Any Student found in violation of these expectations is subject to the sanctions as stated in the Academic Integrity Policy. By selecting the "Assignment" tab, I verify: I am the only person taking and completing the assignment, and no one is helping me (physically or electronically); I will not copy the assignment in part or whole by any means; I will refrain from discussing this exam with anyone other than my professor or a designated DeVry University representative and; I will adhere to the Academic Integrity Policy standards outlined in the Student Handbook.
Important: The Financial Data needed for this assignment is found here in the "Assumptions & Financials" Tab. DO NOT USE the Financial Data from the CanGo Intranet. Use the financial statements from the most recent year to fill in the table below. You may find some formulae calling for an average, e.g., average inventory, average receivables. Because we only have the Balance sheet for one year, you can only use the one year number not an average. Assume interest expense is $0.00 Be Careful of the Debt Equity ratio.
The review covers debt asset ratio as an example of how to calculate ratios and that is different from debt equity ratio, and that is different from the debt equity ratio so think about how you calculate the debt equity ratio using the debt asset ratio as an example. Be sure to cite your references - Please do not use Investopedia or financeformulas.net as a source of reference. Green boxes to be filled in by instructor Ratio Formula (express the ratio in words) Detailed calculation (actual numbers from financial statements used for the calculation) Final number (final result of the detailed calculation) Explanation of why ratio is important.
Paper For Above instruction
The following financial ratio analysis is based on the given financial statements of CanGo as of December 31, 2009, with the purpose of evaluating the company’s financial health and operational efficiency. Each ratio provides insights into different aspects of the company's performance, including liquidity, profitability, leverage, and efficiency, which are crucial for stakeholders’ decision-making.
Liquidity Ratios
Current Ratio
Formula: Current Assets / Current Liabilities
Calculation: $211,970,000 / $42,100,000 = 5.03
Explanation: The current ratio measures the company's ability to meet its short-term obligations with its short-term assets. A ratio above 1 indicates sufficient liquidity; here, a ratio of approximately 5.03 suggests strong liquidity and financial stability, enabling CanGo to cover its current liabilities multiple times over.
Quick Ratio (Acid-Test Ratio)
Formula: (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities
Calculation: ($211,970,000 - $33,750,000 - $200,000) / $42,100,000 = 178,020,000 / 42,100,000 ≈ 4.23
Explanation: This ratio assesses the company's ability to quickly pay off current liabilities using its most liquid assets. A high quick ratio of approximately 4.23 indicates excellent short-term liquidity, with most assets being liquid enough to cover immediate obligations.
Efficiency Ratios
Inventory Turnover
Formula: Cost of Goods Sold / Average Inventory
Calculation: $10,500,000 / $33,750,000 ≈ 0.31
Explanation: Inventory turnover indicates how effectively a company manages its inventory. A ratio of 0.31 suggests that inventory turns over roughly once every 3.23 years, which might imply excess inventory or slow-moving stock, potentially tying up capital unnecessarily.
Receivables Turnover
Formula: Net Credit Sales / Average Accounts Receivable
Calculation: $54,500,000 / $36,500,000 ≈ 1.49
Explanation: It measures how efficiently the company collects receivables. A lower ratio signifies slower collection, which could affect cash flow. In CanGo's case, a ratio of approximately 1.49 indicates relatively sluggish receivables collection, pointing to potential issues in credit policy.
Financial Leverage Ratio
Debt/Equity Ratio
Formula: Total Liabilities / Shareholders' Equity
Calculation: $98,600,000 / $147,050,000 ≈ 0.67
Explanation: This ratio illustrates the proportion of company financing that comes from debt versus shareholders' equity. A ratio of 0.67 suggests that CanGo's leverage is moderate, indicating manageable debt levels relative to equity, reducing financial risk.
Profitability Ratios
Return on Sales (Profit Margin)
Formula: Earnings Before Interest and Taxes (EBIT) / Sales Revenue
Calculation: $10,440,000 / $54,500,000 ≈ 0.1914 or 19.14%
Explanation: This ratio indicates how much profit the company makes on each dollar of sales before interest and taxes. A margin of approximately 19.14% demonstrates strong operational efficiency and profitability.
Return on Assets (ROA)
Formula: Net Income / Total Assets
Calculation: $6,786,000 / $245,650,000 ≈ 0.0276 or 2.76%
Explanation: ROA measures how efficiently the company utilizes its assets to generate net income. The relatively modest ROA of around 2.76% suggests room for improvement in asset utilization.
Total Earned Points
The comprehensive analysis of CanGo's financial ratios reveals a company with strong liquidity, moderate leverage, and solid profitability margins, but with potential concerns regarding inventory management and receivables collection efficiency. Strategic focus on improving inventory turnover and receivables collection could further enhance overall financial health.
References
- Bragg, S. M. (2002). Business ratios and formulas: A comprehensive guide (2nd ed.). Wiley.
- Tracy, A. (2012). Ratio analysis fundamentals: How 17 financial ratios can allow you to analyze any business on the planet (2nd ed.). Bidi Capital Pty.
- Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial statement analysis (11th ed.). McGraw-Hill Education.
- Penman, S. H. (2013). Financial statement analysis and security valuation (5th ed.). McGraw-Hill Education.
- Higgins, R. C. (2012). Analysis for financial management (10th ed.). McGraw-Hill.
- Gibson, C. H. (2012). Financial reporting & analysis (12th ed.). Cengage Learning.
- White, G. I., Sondhi, A. C., & Fried, D. (2003). The analysis and use of financial statements. Wiley.
- Palepu, K. G., & Healy, P. M. (2013). Business analysis & valuation: Using financial statements. Cengage Learning.
- Helfert, E. A. (2001). Techniques of financial analysis: A guide to value creation and shareholder wealth. McGraw-Hill.
- Revsine, L., Collins, W. W., & Johnson, M. (2014). Financial reporting and analysis (6th ed.). Pearson.