Matching Each Ratio With Its Computational Formula LO 13 4

Matching Each Ratio With Its Computational Formula Lo 13 4

Match each definition with its related ratios or percentages by selecting the appropriate letter in the drop down provided. Definitions: Ratios or Percentages Definitions A. Net Income (before extraordinary items) ÷ Net Sales 1 Profit margin B. Days in Year ÷ Receivable Turnover ratio 2 Inventory turnover ratio C. Net Income ÷ Average Stockholders’ Equity 3 Average collection period D. Net Income ÷ Average Number of Shares of Common Stock Outstanding 4 Dividend yield ratio E. Return on Equity ÷ Return on Assets 5 Return on equity F. Quick Assets ÷ Current Liabilities 6 Current ratio G. Current Assets ÷ Current Liabilities 7 Debt-to-equity ratio H. Cost of Goods Sold ÷ Average Inventory 8 Price/earnings ratio I. Net Credit Sales ÷ Average Net Receivables 9 Financial leverage percentage J. Days in Year ÷ Inventory Turnover Ratio 10 Receivable turnover ratio K. Total Liabilities ÷ Stockholders’ Equity 11 Average days’ supply of inventory L. Dividends per Share ÷ Market Price per Share 12 Earnings per Share M. Market Price per Share ÷ Earnings per Share 13 Return on assets N. [Net Income + Interest Expense (net of tax)] ÷ Average Total Assets 14 Quick ratio O. Cash from Operating Activities (before interest and taxes) ÷ Interest Paid 15 Times interest earned P. Net Sales Revenue ÷ Net Fixed Assets 16 Cash coverage ratio Q. (Net Income + Interest Expense + Income Tax Expense) ÷ Interest Expense 17 Fixed asset turnover ratio

Paper For Above instruction

Financial ratios serve as vital indicators of a company's financial health, performance, and operational efficiency. Correctly matching these ratios with their definitions ensures accurate interpretation of financial statements, which is fundamental for investors, managers, and other stakeholders involved in financial analysis. This paper discusses various financial ratios, their purposes, calculations, and significance, providing a comprehensive understanding of their roles within financial statement analysis.

Introduction

Financial ratios are essential tools utilized in analyzing a company's financial condition. They condense large amounts of numerical data from financial statements into meaningful indicators that reflect profitability, liquidity, leverage, and efficiency. Proper comprehension and application of these ratios enable stakeholders to assess financial health, compare performance across periods or with competitors, and make informed decisions. This paper aims to explore notable ratios listed in the matching exercise and elucidate their formulas, significance, and practical applications.

Profitability Ratios

The profit margin ratio (A), calculated as net income before extraordinary items divided by net sales, indicates the percentage of revenue that remains as profit after expenses. This ratio is crucial in assessing how effectively a company manages its costs relative to sales. Similarly, the return on equity (E) measures profitability from the shareholders' perspective by dividing net income by average shareholders' equity. This ratio signifies how effectively a company is utilizing equity capital to generate profits. Profitability ratios are vital for investors seeking to evaluate the company's ability to generate returns and sustain growth.

Liquidity Ratios

Liquidity ratios reflect a company's capacity to meet short-term obligations. The current ratio (G), the quotient of current assets divided by current liabilities, indicates liquidity by showing the available assets to cover short-term liabilities. The quick ratio (F), strict testing of liquidity, excludes inventory from current assets, focusing on more liquid assets to meet immediate liabilities. These ratios are instrumental in assessing short-term financial stability and operational resilience, especially during economic downturns.

Efficiency Ratios

Efficiency or turnover ratios assess how effectively a company utilizes its assets and manages its inventories and receivables. The inventory turnover ratio (2) or (J), calculated as cost of goods sold divided by average inventory, indicates how many times inventory is sold and replaced over a period. The receivable turnover ratio (9), net credit sales divided by average net receivables, measures how efficiently receivables are collected. The approximation of average days' supply of inventory (K) or (11) demonstrates the average number of days inventory is held before sale, providing insights into inventory management efficiency.

Leverage and Market Ratios

Leverage ratios analyze the extent of a company's debt financing. The debt-to-equity ratio (G) illustrates the relative proportion of debt and equity used to finance assets, computed as total liabilities divided by shareholders’ equity. Financial leverage percentage (I) or (9), depicts the amplifying effect of debt on earnings, often used to gauge risk. Market ratios, such as earnings per share (L) and price-to-earnings ratio (M), are critical in valuation, helping investors make buy or sell decisions. Earnings per share is calculated as net income divided by the number of shares outstanding, and the price-to-earnings ratio represents the market price per share divided by earnings per share, reflecting market expectations of future growth.

Additional Ratios

The return on assets (13) or (N), calculated as net income plus interest expense (net of tax) divided by average total assets, offers a comprehensive view of how effectively assets generate profits. The cash flow ratios provide insights into liquidity and operating efficiency, exemplified by cash from operating activities divided by interest paid (O). The cash coverage ratio (Q) evaluates a company's ability to sustain interest payments through pre-interest operating cash flow. The fixed asset turnover ratio (P) measures how well a company uses its fixed assets to generate sales, emphasizing asset utilization efficiency.

Conclusion

Matching financial ratios with their clear definitions and formulas enhances the accuracy of financial analysis and decision-making. The various ratios discussed provide vital insights into different aspects of a company's performance, such as profitability, liquidity, efficiency, leverage, and market valuation. Understanding their calculations and implications allows stakeholders to interpret financial statements more effectively, identify strengths or weaknesses, and make informed strategic decisions. Continuous learning and application of these ratios are essential for effective financial management and investment analysis, reinforcing the importance of financial literacy in business practice.

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