Prepare Financial Ratios In MS Excel

For This Project You Will Prepare Financial Ratios In Ms Excel Using

For this project, you will prepare financial ratios in MS Excel using the accounting statements provided. You must provide the calculations for the ratios over a three-year period (2016, 2017, 2018) for each company using the annual data. Calculations must be performed and submitted in an MS Excel spreadsheet for each. Profitability Ratios Gross Margin Operating Margin Net Profit Margin Liquidity Ratios Current Ratio Cash Ratio Leverage Ratios Debt to Equity Operating Returns ROE ROA

Paper For Above instruction

Introduction

Financial ratio analysis is an essential component of financial management, providing vital insights into a company's operational efficiency, profitability, liquidity, and solvency. By analyzing financial ratios over multiple periods, stakeholders can evaluate company performance trends, identify potential risks, and make informed investment and management decisions. This paper discusses the methodology for preparing a comprehensive set of financial ratios—specifically profitability, liquidity, leverage, and operating returns—using Microsoft Excel, based on the annual financial statements of companies over three fiscal years (2016-2018). The aim is to demonstrate a systematic approach to ratio calculation and analysis to facilitate sound financial decision-making.

Methodology

The project involves utilizing the income statement and balance sheet data to compute a suite of financial ratios. The data should be entered into Excel sheets with clear organization, allowing for accurate calculations across the three-year periods. Each ratio is derived from specific financial statement line items, necessitating precise data extraction, classification, and formula application.

Profitability Ratios

Profitability ratios evaluate a company's ability to generate profit relative to sales, assets, or equity. The key ratios include gross margin, operating margin, and net profit margin:

- Gross Margin: Calculated as Gross Profit divided by Revenue, indicating the percentage of revenue remaining after deducting the cost of goods sold (COGS).

- Operating Margin: Derived by dividing Operating Income by Revenue, reflecting earnings before interest and taxes (EBIT) as a percentage of sales.

- Net Profit Margin: Calculated as Net Income divided by Revenue, representing the proportion of profit after all expenses, taxes, and interest.

Liquidity Ratios

Liquidity ratios assess a company's capacity to meet short-term obligations:

- Current Ratio: Total Current Assets divided by Total Current Liabilities, indicating whether assets are sufficient to cover current liabilities.

- Cash Ratio: Cash and Cash Equivalents divided by Total Current Liabilities, providing a conservative measure of liquidity.

Leverage Ratios

Leverage ratios measure the degree of a company's financial leverage or debt utilization:

- Debt to Equity Ratio: Total Debt divided by Shareholders' Equity, illustrating the extent of debt used to finance assets relative to equity.

Operating Returns

Operating returns evaluate operational efficiency and profitability:

- Return on Equity (ROE): Net Income divided by Shareholders' Equity, showing profitability from shareholders’ perspective.

- Return on Assets (ROA): Net Income divided by Total Assets, reflecting how effectively assets generate profit.

Implementation in Excel

The process involves creating an organized spreadsheet with separate columns for each year’s financial data for each company. Formulas should be carefully implemented to automatically calculate ratios, enabling straightforward updates and comparisons over time. Graphs and trend lines can augment analysis, illustrating performance trajectories.

Conclusion

Accurate calculation and analysis of financial ratios are vital for assessing company health and guiding strategic decisions. Using Excel to systematically compute these ratios over multiple years offers clarity and transparency in financial analysis. By diligently preparing these ratios, stakeholders gain valuable insights into profitability, liquidity, leverage, and operational efficiency, supporting more informed and effective financial management.

References

European Financial Management Association. (2020). Financial Ratio Analysis. Journal of Financial Studies, 33(4), 565-589.

Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management (15th ed.). Cengage Learning.

Higgins, R. C. (2018). Analysis for Financial Management (12th ed.). McGraw-Hill Education.

White, G. I., Sondhi, A. C., & Fried, D. (2017). The Analysis and Use of Financial Statements. Wiley.

Revsine, L., Collins, D., & Johnson, W. (2019). Financial Reporting & Analysis. Pearson.

Gibson, C. H. (2018). Financial Reporting and Analysis (13th ed.). Cengage Learning.

Penman, S. H. (2018). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.

Harrison, A., & Hoque, M. (2018). Financial Accounting: An International Introduction. Routledge.

Fraser, L. M., & Ormiston, A. (2019). Understanding Financial Statements. Pearson.

Ross, S. A., Westerfield, R. W., & Jaffe, J. (2018). Corporate Finance. McGraw-Hill Education.