Financial Statement Analysis

Ratio Analysis Example

Prufrock Corporation Balance Sheet as of December 31,2008 ($ in millions)
Assets Liabilities and Owners’ Equity
Current assets Current liabilities
Cash $98 Accounts payable $344
Accounts receivable $188 Notes payable $196
Inventory $422 Total $540
Total $708 Long-term debt $457
Fixed assets Owners’ equity
Net plant and equipment $2,880 Common stock and paid-in surplus $550
Total assets $3,588 Retained earnings $2,041
Total $2,591
Total liabilities and owners’ equity $3,588
Prufrock Corporation 2008 Income Statement ($ in millions)
Sales 2311
Cost of goods sold 1344
Depreciation 276
Earnings before interest and taxes 691
Interest paid 141
Taxable income 550
Taxes (34%) 187
Net income 363
Dividends 121
Addition to retained earnings 242
*Create common size balance sheet and common size income statement.

*Calculate ratios for Prufrock Corporation

Short-term solvency or liquidity ratios

Liquidity ratio measures the firm’s ability to pay its bills over the short run without undue stress.

Current ratio=

*Do we have enough short-term liquid assets to cover our short-term debts?

Quick ratio (acid test ratio) =

*Do we have enough really liquid short-term assets to cover our short-term debts?

Long-term solvency, or financial leverage, ratios

Leverage ratio measures the form’s long-run ability to meet its obligations.

Total debt ratio=

What percentage of total assets is financed with either short- or long-term debt?

Debt-equity ratio=

Times interest earned=

  • It measures how well a company has its interest obligations covered. Are we generating enough income to make out interest payments?

Asset management or turnover ratios

Turnover ratios measure asset use efficiency.

Inventory turnover=

*On average, how many times per year do we go through our inventory? (Excess inventory is expensive!)

Day’s sales Outstanding=

Fixed Assets Turnover Ratio=

Total Assets Turnover Ratio=

Profitability ratios

Operating margin=

Profit margin=

Return on assets (ROA) =

*What is profit per dollar of asset?

Return on equity (ROE) =

*What is the rate of return for stockholders?

Return on equity (ROE) = Profit margin * Total asset turnover * Equity multiplier

Market value ratios

(We assume that Prufrock has 33 million shares outstanding and stock sold for $88 per share at the end of the year.)

EPS=

Price-earnings ratio=

Market-to-book ratio=

4-1

Place your order
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our Guarantees

Money-back Guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism Guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision Policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy Policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation Guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more
error: