Financial Ratio Analysis
Data from Income statement:
2008 2009 2010
Total Sales 2,085 3,124 4,154
Cost of Goods Sold 1,551 1,927 2,390
Interest Expense 105 105 112
Pre-tax Operating Income 210 326 557
Net Income after Taxes 141 216 366
Dividends Paid
Data from Balance Sheet:
2008 2009 2010
ASSETS
Cash 69 232 133
Accounts Receivable 113 122 130
Inventory 4 4 4
Total Current Assets 1,418 1,872 2,334
Total Assets 2,297 2,579 3,151
LIABILITIES
Current Portion of LT Debt 100 100 100
Total Current Liabilities 802 1,011 1,345
Total Liabilities 1,173 1,216 1,463
Owners' Equity 861 1,133 1,481
Shares Outstanding 500,000 500,000 500,000
Data Shown in Thousands of Rupees
2008 2009 2010
Debt to equity 1.36 1.07 0.99
Assets to equity 2.67 2.28 2.13
Debt ratio 0.51 0.47 0.46
Times interest earned 2.00 3.10 4.97
Net wkg cap'l (,000 OMITTED) 0.62 0.86 0.99
Working capital to assets 0.27 0.25 0.28
Current ratio 1.77 1.85 1.74
Quick ratio 0.23 0.35 0.20
Inventory turnover 387.75 481.75 597.50
Days sales in inventory 0.94 0.76 0.61
Asset turnover 0.91 1.21 1.32
Equity turnover 2.42 2.76 2.80
Working capital turnover 3.38 3.63 4.20
Return on sales 0.07 0.07 0.09
Return on total assets 0.06 0.08 0.12
Gross margin 0.26 0.38 0.42
DEBT TO EQUITY:
This ratio is an indicator of the extent to which a company is using financial
leverage. Generally, a high ratio is acceptable in industries with stable
earnings and less acceptable in industries where earnings are lower and less
predictable. The ratio is calculated an expressed as:
ASSETS TO EQUITY:
This ratio is an indicator of the extent to which a company is leveraging invested capital. Again, a high ratio is acceptable in industries with stable earnings and less acceptable in industries where earnings are lower and less predictable. The ratio is calculated and expressed as:
Assets Stockholders' Equity
DEBT RATIO:
This is another leverage measurement. It reflects the extent to which debt is being use to finance the acquisition of assets. The ratio is calculated and expressed as:
Liabilities Assets
TIMES INTEREST EARNED:
This important ratio measures the ability of a company to pay the interest on its long- term debt. A high multiple provides comfort to lenders in terms of the decline in profitability that can occur before the payment of interest becomes a problem. A
companion ratio, debt service coverage (the subject of another spreadsheet template),measures the earnings available to meet total debt service, including principal and interest. Both ratios can be misleading if major debt has been
Liabilities Stockholders' Equity
outstanding less than a fullyear. The times interest earned ratio is calculated and expressed as:
SEARLE debt to equity Ratio is decreasing which is not a good indicator and
it need to work on it. If a lot of debt is used to finance increased operations
(high debt to equity), the company could potentially generate more
earnings than it would have without this outside financing. If this were to
increase earnings by a greater amount than the debt cost (interest), then the
shareholders benefit as more earnings are being spread among the same
amount of shareholders. However, the cost of this debt financing
may outweigh the return that the company generates on the debt through
investment and business activities and become too much for the company to
handle. This can lead to bankruptcy, which would leave shareholders with
nothing.
SEARLE asset to equity ratio is also decreasing which means it has
decreasing asset/equity ratio which indicates a strong firm that needs no
debt, or an overly conservative company, foolishly foregoing business
opportunities.
Net
IncomeBeforeIncomeTaxes&Interes t
SEARLE time interest earned is decreasing which means that it is becoming
less capable the to pay the interest on its debt.
SEARLE has a constant debt ratio of less than 1 indicates that a company has
more assets than debt.
INDICATORS OF LIQUIDITY
NET WORKING CAPITAL:This component of the template is presented in terms of dollars, not a ratio. It is an important measure of the dollar effect of completing the business cycle. Working capital is calculated and expressed as:
Current Assets minus Current Liabilities WORKING CAPITAL TO ASSETS:
Growth without sufficient working capital can mean disaster. It is important to monitor the proportion of working capital to total assets as an indicator of liquidity. The ratio is calculated and expressed as:
Current Assets minus Current
Liabilities
Total Assets
CURRENT RATIO:
This ratio is the one most often used to measure a company's ability to pay its bills within the next accounting period, usually one year. The "2:1 syndrome" is
pervasive and is a presumption of financial health. This ratio can be too high as well as too low. The components need to be examined closely; a high inventory may be the result of low turnover, and high receivables may be the result of slow
collections. The ratio is calculated and expressed as:
Current Assets Current Liabilities
Sometimes referred to as the "acid test" ratio, the quick ratio is a more critical test of ability to pay debts than the current ratio. Inventories and prepaid items are excluded from the computation, which is calculated and expressed as:
Cash + Receivables + Temp
Investments
Current Liabilities
SEARLE has increasing net working capital. It has Positive working capital
which means that the company is able to pay off its short-term liabilities with
its current assets (cash, accounts receivable and inventory).
SEARLE has increasing working capital to asset ratio. An increasing Working
Capital to Total Assets ratio is usually a positive sign, showing the company's
liquidity is improving over time.
SEARLE has increasing quick ratio. higher quick ratio indicates the better
position of the company to meet its short-term obligations with its most
liquid assets.
SEARLE has increasing current ratio which tells company's ability has high
ability to pay back its term liabilities (debt and payables) with its
company would be able to pay off its obligations if they came due at that
point. While this shows the company is in good financial health.
INDICATORS OF ASSET MANAGEMENT
INVENTORY TURNOVER:This measurement is an indicator of the effectiveness of the company's inventory management policy. The higher the turnover during the accounting period, the less
capital that must be devoted to carrying this asset. To be more accurate, inventory turnover should be measured in relation to the average inventory during the period. When using the year-end inventory figure, the goals should be set
accordingly, that is, higher if year-end inventories are lower than average and lower if they are higher. This ratio is calculated and expressed as:
Cost of Goods Sold Inventory
DAYS SALES IN INVENTORY:
This ratio is another approach to measuring the effectiveness of inventory control. In theory it measures the number of days needed to sell the entire inventory if the mix of merchandise were perfect. Too high a ratio may mean either a poor mix or excess levels of certain items. Correspondingly, too low a ratio may indicate that
orders cannot be filled promptly, resulting in backorders or lost sales. This ratio is calculated and expressed as:
Inventory Cost of Goods Sold divided by
365
ASSET TURNOVER:
This ratio measures the amount of assets required to produce sales. It is measured and expressed as:
Sales Total
Assets
EQUITY TURNOVER:
This ratio measures the amount of equity required to produce sales. It is measured and expressed as:
Sales
Equity
WORKING CAPITAL TURNOVER:
This ratio measures the amount of working capital required to produce sales. It is measured and expressed as:
Sales
Current Assets - Current
SEARLE has increasing inventory ratio which means its products don’t stay in
the warehouse for longer period of time which is a good sign.
Working capital ratio is constantly increasing which means that the company
is generating a lot of sales compared to the money it uses to fund the sales.
Equity turnover is increasing which means company is using its capital
efficiently.
Asset turnover is increasing slightly but it’s very good which means firm's
efficient at using its assets in generating sales or revenue.
SEARLE has decreasing days sales in inventory which means they are
capable to convert their raw materials to revenues in lesser days.
INDICATORS OF PROFITABILITY
RETURN ON SALES:The volume of sales has a more meaningful relationship to net income when it is expressed as a ratio. Extraordinary income or expense is not considered in this calculation in order to avoid distorting the result. The ratio is calculated and expressed as:
Net Operating Income After Income
Net Sales
RETURN ON TOTAL ASSETS:
One way to measure return on assets is in relation to total assets regardless of the source of their financing. This ratio is calculated and expressed as:
Net Operating Income After Income Taxes Total Assets GROSS MARGIN:
Total Sales - Cost of
Sales = .XX