CHAPTER 1: THE ROLE OF MANAGERIAL FINANCE

FINANCE
●​Defined as the science and art of managing money.
●​Personal level - finance is concerned with individuals’ decisions about how much of their
earnings they spend, how much they save, and how they invest their savings.
●​Business level - finance involves the same types of decisions: how firms raise money from
investors, how firms invest money in an attempt to earn a profit, and how they decide
whether to reinvest profits in the business or distribute them back to investors.
CAREER OPPORTUNITIES IN FINANCE
FINANCIAL SERVICES
●​The area of finance concerned with the design and delivery of advice and financial products
to individuals, businesses, and governments.
●​Career opportunities: banking, personal financial planning, investments, real estate, and
insurance.

MANAGERIAL FINANCE
●​Concerned with the duties of the financial manager working in a business.
●​Financial managers - administer the financial affairs of all types of businesses—private and
public, large and small, profit-seeking and not-for-profit.
○​They perform such varied tasks as developing a financial plan or budget, extending credit
to customers, evaluating proposed large expenditures, and raising money to fund the
firm’s operations.
○​Because of financial crises, stricter regulations, global competition, fast and new
technology, and globalization, the role of financial manager has become more complex
and more critical, especially in managing international cash flows and risk protection.
CAREER OPPORTUNITIES IN MANAGERIAL FINANCE

Position Description

Financial Analyst Prepares the firm's financial plans and budgets. Other duties include financial
forecasting, performing financial comparisons,and working closely with accounting.

Capital Expenditures Manager Evaluates and recommends proposed long-term investments. May be involved in the
financial aspects of implementing approved investments.

Project Finance Manager Arranges financing for approved long-term investments. Coordinates consultants,
investment bankers,and legal counsel.

Cash Manager Maintains and controls the firm's daily cash balances. Frequently manages the firm's
cash collection and disbursement activities and short-term investments and
coordinates short-term borrowing and banking relationships.

Credit Analyst/Manager Administers the firm's credit policy by evaluating credit applications,extending
credit,and monitoring and collecting accounts receivable.

Pension Fund Manager Oversees or manages the assets and liabilities of the employees' pension fund.

Foreign Exchange Manager Manages specific foreign operations and the firm's exposure to fluctuations in exchange
rates.
GOAL OF THE FIRM: MAXIMIZE SHAREHOLDER’S WEALTH
●​Decision rule for managers: only take actions that are expected to increase the share price.
●​Share Price Maximization - Financial decisions and share price

*Note: Reject if share price decreased or remains unchanged.

●​Why is the goal not to maximize profit? —Profit maximization may not lead to the highest
possible share price for at least three reasons:
1.​ Timing is important—the receipt of funds sooner rather than later is preferred
2.​ Profits do not necessarily result in cash flows available to stockholders
3.​ Profit maximization fails to account for risk
●​What about Stakeholders?
○​Stakeholders are groups such as employees, customers, suppliers, creditors, owners, and
others who have a direct economic link to the firm.
■​ Stakeholders - supports the firm
■​ Shareholders - owners of the firm
○​A firm with a stakeholder focus consciously avoids actions that would prove detrimental to
stakeholders. The goal is not to maximize stakeholder well-being but to preserve it.
○​Such a view is considered to be "socially responsible."
THE ROLE OF BUSINESS ETHICS
●​Business Ethics - standards of conduct or moral judgment that apply to persons engaged in
commerce.
●​Violations of these standards in finance involve a variety of actions: “creative accounting,”
earnings management, misleading financial forecasts, insider trading, fraud, excessive
executive compensation, options backdating, bribery, and kickbacks.
●​Negative publicity = negative impacts on a firm.
MANAGERIAL FINANCE FUNCTION
●​The size and importance of the managerial finance function depends on the size of the firm.
●​Small firms - finance function is generally performed by the accounting department.
●​Large firms - finance function typically evolves into a separate department linked directly to
the company president or CEO through the chief financial officer (CFO)
●​Corporate organization - the general organization of a corporation and the finance function
(shown in yellow).
MANAGERIAL FINANCE FUNCTION: RELATIONSHIP TO ECONOMICS
●​The field of finance is closely related to economics.
●​Financial managers must understand the economic framework and be alert to the
consequences of varying levels of economic activity and changes in economic policy.
●​They must also be able to use economic theories as guidelines for efficient business
operation
●​Marginal cost–benefit analysis (MCBA) is the economic principle that states that financial
decisions should be made and actions taken only when the added benefits exceed the added
costs.
○​✔ Benefits > Costs
○​✘ Benefits ≤ Costs

MANAGERIAL FINANCE FUNCTION: RELATIONSHIP TO ACCOUNTING

●​The firm’s finance and accounting activities are closely-related and generally overlap.
●​In small firms accountants often carry out the finance function, and in large firms financial
analysts often help compile accounting information.
●​One major difference in perspective and emphasis between finance and accounting is that
accountants generally use the accrual method while in finance, the focus is on cash
flows.
○​Accrual basis - records when earned even if not yet received
○​Cash basis- only records when received
●​Whether a firm earns a profit or experiences a loss, it must have a sufficient flow of cash to
meet its obligations as they come due.
●​Finance and accounting also differ with respect to decision-making:
○​Accountants devote most of their attention to the collection and presentation of
financial data – Example: Controller
 ○​Financial managers evaluate the accounting statements, develop additional data, and
make decisions on the basis of their assessment of the associated returns and risks –
Example: Treasurer
GOVERNANCE AND AGENCY

CORPORATE GOVERNANCE
●​The rules, processes, and laws by which companies are operated, controlled, and regulated.
●​It defines the rights and responsibilities of the corporate participants such as the
shareholders, board of directors, officers and managers, and other stakeholders, as well as
the rules and procedures for making corporate decisions.

INDIVIDUAL VS. INSTITUTIONAL INVESTORS

●​Individual Investors (retail investors) - are investors who own relatively small quantities of
shares so as to meet personal investment goals.
●​Institutional Investors (wholesale investors) - are investment professionals, such as banks,
insurance companies, mutual funds, and pension funds, that are paid to manage and hold
large quantities of securities on behalf of others.
●​Unlike individual investors, institutional investors often monitor and directly influence a firm’s
corporate governance by exerting pressure on management to perform or communicating
their concerns to the firm’s board.

THE AGENCY ISSUE

●​Principal-agent relationship - arrangement in which an agent acts on the behalf of a
principal. For example, shareholders of a company (principals) elect management (agents) to
act on their behalf.
●​Agency problems - arise when managers place personal goals ahead of the goals of
shareholders (arises because of principal-agent relationship).
●​Agency costs arise from agency problems that are borne by shareholders and represent a
loss of shareholder wealth.
●​Management Compensation Plans:
○​In addition to the roles played by corporate boards, institutional investors, and
government regulations, corporate governance can be strengthened by ensuring that
managers’ interests are aligned with those of shareholders.
○​A common approach is to structure management compensation to correspond with firm
performance.
■​ Incentive plans are management compensation plans that tie management
compensation to share price; one example involves the granting of stock options.
■​ Performance plans tie management compensation to measures such as EPS or growth
in EPS. Performance shares and/or cash bonuses are used as compensation under
these plans.
CHAPTER 2: FINANCIAL STATEMENT ANALYSIS
LESSON OVERVIEW: FS ANALYSIS
1. HORIZONTAL ANALYSIS
a.​ Dollar Change and Percentage Change ($∆ and %∆)
b.​ Trend Percentage Analysis
2. VERTICAL ANALYSIS/ COMMON-SIZE STATEMENTS
a.​ Balance Sheet - Base: Total Assets
b.​ Income Statement - Base: Net Sales
3. RATIO ANALYSIS
I. Types of Ratio Comparisons
a.​ Cross-Sectional Analysis
b.​ Time-Series Analysis
c.​ Combined Analysis
II. Categories of Financial Ratio
a.​ Liquidity Ratio
i.​ Current Ratio
ii.​ Quick Ratio
b.​ Activity Ratio
i.​ Inventory Turnover
ii.​ Average Age of Inventory
iii.​ Average Collection Period
iv.​ Average Payment Period
v.​ Total Asset Turnover
c.​ Solvency Ratio
i.​ Debt Ratio
ii.​ Time Interest Earned Ratio
d.​ Profitability Ratio
i.​ Gross Profit Margin
ii.​ Operating Profit Margin
iii.​ Net Profit Margin
iv.​ Earnings Per Share
v.​ Return on Total Assets
vi.​ Return of Equity
e.​ Market Ratio
i.​ Price Earnings (P/E) Ratio
ii.​ Market Book (M/B) Ratio
III. DuPoint Analysis
a.​ Return on Assets (ROA)
b.​ Return on common Equity (ROE)
THE STOCKHOLDERS’ REPORT
●​Generally accepted accounting principles (GAAP) are the practice and procedure
guidelines used to prepare and maintain financial records and reports; authorized by the
Financial Accounting Standards Board (FASB).
●​ GAAP vs. PFRS (Philippines Financial Reporting Standard
○​GAAP - General
○​PFRS - Specific
●​(GAAP) aims to improve the objectivity, clarity, consistency, and comparability of the
communication of financial information
FOUR KEY FINANCIAL STATEMENTS

I. INCOME STATEMENT
●​The income statement provides a financial summary of a company’s operating results
during a specified period.
●​Although they are prepared quarterly for reporting purposes, they are generally computed
monthly by management and quarterly for tax purposes.
○​Annual Reporting - Annual
○​Interim Reporting - Period shorter than a year (usually quarterly or monthly)
●​Income Statement computations for a Corporation:
Sales revenue xxx
Less: COGS (xxx)
Gross Profit xxx
Less: Operating Expenses (xxx)
Operating Profits/Earnings before Interest & Taxes xxx
Less: Interest Expense (xxx)
Net Profits before taxes xxx
Less: Taxes (xxx)
Net Profits after taxes/Net income xxx
●​Earnings per share (EPS) Allocation:
Net Income xxx
Less: Preferred stock dividends (xxx)
Earnings available for common stockholders xxx
Divide: Shares of common stock outstanding xxx
Earnings Per Share xxx
●​Dividends per share (EPS) Allocation:
Total cash dividends declared/paid to common sh xxx
Less: Preferred stock dividends (xxx)
Earnings available for common stockholders xxx
Divide: Shares of common stock outstanding xxx
Dividends Per Share xxx

II. BALANCE SHEET

●​It presents a summary of a firm’s financial position at a given point in time.
●​The statement balances the firm’s assets (what it owns) against its financing, which can be
either debt (what it owes) or equity (what was provided by owners).
○​Assets = Liabilities + Owners' Equity

III. STATEMENT OF RETAINED EARNINGS

●​It reconciles the net income earned during a given year, and any cash dividends paid, with
the change in retained earnings between the start and the end of that year.
○​Statement of Changes in Owners’ Equity
○​Statement of Changes in Partners’ Equity
○​Statement of Changes in Stockholders’ Equity
●​Computation: Beginning RE + Net Income – Cash Dividends = Ending RE
IV. STATEMENT OF RETAINED EARNINGS
●​It provides a summary of the firm’s operating, investment, and financing cash flows and
reconciles them with changes in its cash and marketable securities during the period.
○​Operating – Current assets, current liabilities
○​Investing – Non-current assets
○​Financing – Non-current Liabilities, equity
●​This statement not only provides insight into a company’s investment, financing and
operating activities, but also ties together the income statement and previous and current
balance sheets.
●​Computation: CF from Operating Activities ± CF from Investment Activities ± CF from
Financing Activities = Net increase/decrease in cash
FINANCIAL STATEMENT ANALYSIS
●​The process of analyzing a company’s financial statements for decision-making purposes.
External stakeholders use it to understand the overall health of an organization and to
evaluate financial performance and business value. Internal constituents use it as a
monitoring tool for managing the finances.
○​External stakeholders - creditors, banks, government, investors, etc.
○​Internal constituents - managers, accountants, etc.
●​Financial accounting calls for all companies to create a balance sheet, income statement,
changes in owners equity and cash flow statement, which form the basis for financial
statement analysis.
●​Three techniques that analysts use when analyzing financial statements:
1.​ Horizontal Analysis
2.​ Vertical Analysis
3.​ Ratio Analysis
LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS
1. DIFFERENCES IN ACCOUNTING METHODS
●​Differences in accounting method between companies sometimes make comparison difficult
●​Because of differences in accounting methods FS analysis could be misleading.
●​Example: Company A uses LIFO method while Company B uses Weighted Average method to
value inventory

2. BEYOND THE RATIOS

1. Industry Trends
2. Changes within the company
3. Consumer tastes
4. Economic Factors
5. Technological changes
STATEMENTS IN COMPARATIVE AND COMMON-SIZE FIRM
●​An item on a financial statement has little meaning by itself. The meaning of the numbers can
be enhanced by drawing comparisons.
1.​ Dollar and percentage changes on statements (Horizontal)
2.​ Common-size statements (Vertical)
 3.​ Ratios
I. HORIZONTAL ANALYSIS
●​Horizontal Analysis (or Trend Analysis) shows the changes between years in the financial data
in both dollar and percentage change form.
A.1. Dollar Change
●​Calculating change in dollar amounts
●​Formula:
𝐷𝑜𝑙𝑙𝑎𝑟 𝐶ℎ𝑎𝑛𝑔𝑒 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡𝑠 𝑌𝑒𝑎𝑟 𝐹𝑖𝑔𝑢𝑟𝑒 − 𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝐹𝑖𝑔𝑢𝑟𝑒
○​Base year figure - the dollar amounts for last year become the “base” year figures
A.2. Percentage Change
●​Calculating change as a percentage
●​Formula:
𝐷𝑜𝑙𝑙𝑎𝑟 𝐶ℎ𝑎𝑛𝑔𝑒
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 = 𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑓𝑖𝑔𝑢𝑟𝑒
× 100

EXAMPLE: Dollar and Percentage Change

1. Balance Sheet:
Current Base Yr Increase (Decrease)
This Year Last Year Amount %
(A) (B) (C) (D)
Formula given given (A-B) (C/B)×100
Assets
Current Assets:
Cash $12,000 $23,500 $(11,500) (48.90)
Accounts Receivable, net 60,000 40,000 20,000 50.00
Inventory 80,000 100,000 (20,000) (20.00)
Prepaid Expenses 3,000 1,200 1,800 150
Total Currents Assets 155,000 164,700 (9,700) (5.90)
Property, Plant, and Equipment:
Land 40,000 40,000 - 0.00
Buildings and Equipment, net 120,000 85,000 35,000 41.20
Total Property and equipment 160,000 125,000 35,000 28.00
Total Assets $315,000 $289,70 $25,300 8.70
●​Could also be done for the liabilities and equity…
2. Income Statement:
Current Base Yr Increase (Decrease)
This Year Last Year Amount %
(A) (B) (C) (D)
Formula given given (A-B) (C/B)×100
Sales $520,000 $480,000 $40,000 8.33
Cost of goods sold 360,000 315,000 45,000 14.29
Gross Margin 160,000 165,000 (5,000) (3.03)
Operating Expenses 128,600 126,000 2,600 2.06
Net Operating Income 31,400 39,000 (7,600) (19.49)
Interest Expense 6,400 7,000 (600) (8.57)
Net Income before Taxes 25,000 32,000 (7,000) (21.88)
Less: Income Taxes (30%) 7,500 9,600 (2,100) (21.88)
Net Income $17,500 $22,400 $(4,900) (21.88)
●​Sales increased by 8.33% yet net income decreased by 21.88%.
●​There was an increase in both COGS (14.29%) and OpEx (2.06%).
●​These increased costs more than offset the increase in sales, yielding an overall decrease in
net income
●​Recommendations: Find better suppliers and cut unnecessary expenses.
B. Trend Percentages
●​Trend percentages state several years’ financial data in terms of a base year, which equals
100%.
●​Formula:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡
𝑇𝑟𝑒𝑛𝑑 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 = 𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡
× 100

EXAMPLE: Trend Analysis

Income information of a company for the years 2007 through 2011.
Years
item Current Current Current Current Base (100%)
2011 2010 2009 2008 2007
Sales $400,000 $355,000 $320,000 $290,000 $275,000
Cost of goods sold 285,000 250,000 225,000 198,000 190,000
Gross Margin 115,000 105,000 95,000 92,000 85,000
●​Computation:
Years
item Current Current Current Current Base (100%)
2011 2010 2009 2008 2007
Sales 145% 129% 116% 105% 100%
Cost of goods sold 150% 132% 118% 104% 100%
Gross Margin 135% 124% 112% 108% 100%
●​(Current year / Base year) × 100
○​2008:
■​Sales: (290,000/275,000) × 100 = 105%
■​COGS: (198,000/190,000) × 100 = 104%
■​GM: (92,000/85,00) × 100 = 108%
○​2009:
■​Sales: (320,000/275,000) × 100 = 116%
■​COGS: (225,000/190,000) × 100 = 118%
■​GM: (95,000/85,00) × 100 = 112%
○​And so on…
●​We can see that cogs is increasing faster than sales, which is slowing the increase in gross
margin.
II. VERTICAL ANALYSIS (COMMON-SIZE STATEMENTS)
●​Vertical analysis focuses on the relationships among financial statement items at a given
point in time. A common-size financial statement is a vertical analysis in which each
financial statement item is expressed as a percentage.
○​In Balance Sheet, all items usually are expressed as a percentage of total assets
■​Base - Total Assets (100%)
 ○​In Income Statement, all items are expressed as a percentage of Net Sales
■​Base - Net Sales (100%)
●​Common-size FS are particularly useful when comparing data from different companies.
●​Formula: for Income Statement
𝑖𝑛𝑑𝑖𝑣𝑖𝑑𝑢𝑎𝑙 𝑖𝑡𝑒𝑚
𝐶𝑜𝑚𝑚𝑜𝑛 𝑠𝑖𝑧𝑒 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 = 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
× 100
●​Formula: for Balance Sheet
𝑖𝑛𝑑𝑖𝑣𝑖𝑑𝑢𝑎𝑙 𝑖𝑡𝑒𝑚
𝐶𝑜𝑚𝑚𝑜𝑛 𝑠𝑖𝑧𝑒 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
× 100

EXAMPLE: Vertical analysis (Income Statement - Base = net sales (100%))

Comparative Income Statement of a company from this year and last year.
Common-size percentage
This Year Last Year This Year Last Year
Sales (Base = 100%) $520,000 $480,000 100 100
Cost of goods sold 360,000 315,000 69.23 65.63
Gross Margin 160,000 165,000 30.77 34.38
Operating Expenses 128,600 126,000 24.73 26.25
Net Operating Income 31,400 39,000 6.04 8.13
Interest Expense 6,400 7,000 1.23 1.46
Net Income before Taxes 25,000 32,000 4.81 6.67
Less: Income Taxes (30%) 7,500 9,600 1.44 2.00
Net Income $17,500 $22,400 3.37 4.67
●​Computations: for income statement, sales is always the denominator (total assets for
balance sheet)
○​COGS (last year): (315,000/480,000) × 100 = 65.63%
○​COGS (this year): (360,000/520,000) × 100 = 69.23%
○​And so on…
NOTES
●​GOAL = MinMax Approach
○​Minimize expenses and costs, Maximize revenue
●​Notes in solving Horizontal and Vertical Analysis:
1.​ Compute with the corresponding formula
2.​ Analyze the FS
3.​ Recommendations (Basis: MinMax Approach) — be specific!

CHAPTER 3: FINANCIAL RATIO ANALYSIS

USING FINANCIAL RATIOS: INTERESTED PARTIES
●​Ratio analysis involves methods of calculating and interpreting financial ratios to analyze
and monitor the firm’s performance.
●​Current and prospective shareholders are interested in the firm’s current and future level of
risk and return, which directly affect share price.
●​Creditors are interested in the short-term liquidity of the company and its ability to make
interest and principal payments.
●​Management is concerned with all aspects of the firm’s financial situation, and it attempts to
produce financial ratios that will be considered favorable by both owners and creditors.
TYPES OF RATIO COMPARISONS

1. CROSS-SECTIONAL ANALYSIS
●​The comparison of different firms’ financial ratios at the same point in time; involves
comparing the firm’s ratios to those of other firms in its industry or to industry averages.
○​Different firms, same industry (Ex: Jollibee and Mcdonalds)
●​Benchmarking is a type of cross-sectional analysis in which the firm’s ratio values are
compared to those of a key competitor or group of competitors that it wishes to emulate.
○​Benchmarking - basis for decision-making.

2. TIME-SERIES ANALYSIS
●​ The evaluation of the firm’s financial performance over time using financial ratio analysis
●​Comparison of current to past performance, using ratios, enables analysts to assess the
firm’s progress.
●​Developing trends can be seen by using multiyear comparisons.

3. COMBINED ANALYSIS
●​ The most informative approach to ratio analysis combines cross-sectional and time-series
analyses.

TYPES OF RATIO COMPARISONS

Cross-Sectional Analysis Different firms, same industry, at the same point in time
(ex: ROE of Jollibee and Mcdonalds in 2026)
Time-Series Analysis Same firm, at a different points in time
(ex: ROE of Jollibee from 2025 and 2026)
Combined Analysis Different firms, same industry, at a different points in time
(ex: comparing ROE of Jollibee and Mcdonalds from 2025, 2026, and
2027)

CAUTIONS IN USING RATIO ANALYSIS

●​Ratios that reveal large deviations from the norm merely indicate the possibility of a
problem.
1.​ A single ratio does not generally provide sufficient information from which to judge the
overall performance of the firm.
2.​ The ratios being compared should be calculated using financial statements dated at the
same point in time during the year.
3.​ It is preferable to use audited financial statements (checked by independent auditors —
more reliable and credible, and it reduces risk of errors)
4.​ The financial data being compared should have been developed in the same way.
5.​ Results can be distorted by inflation (increase in price commodity)
 RATIO ANALYSIS
I. LIQUIDITY RATIOS

1. Current Ratio (CR)

●​Formula:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
●​Basis: CR > 1
●​Sign: X
●​What does the value mean:
○​CR>1: liquid
○​CR<1: not liquid—higher current liabilities than current assets
■​Recommendations: Increase cash collections or receivables, Reduce short-term debts
(invest more on long-term)
●​DETERMINANTS OF LIQUIDITY NEEDS
○​Large firms - Low CR is okay because it has unlimited credit access (well established
relationships with banks that can provide lines of credit and other short-term loans)
○​Small firms - High CR is needed because of limited credit access

2. Quick Ratio (QR)

●​Formula:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠
𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
●​Basis: QR > 1
●​Sign: X
𝐵𝑒𝑔 𝑖𝑛𝑣 + 𝐸𝑛𝑑 𝑖𝑛𝑣
●​Note: If beg inv and end inv were give, use the average = 2
●​What does the value mean:
○​QR>1: liquid
○​QR<1: not liquid—higher current liabilities than current assets, and too much inventories.
■​Recommendations: Increase cash collections, reduce short-term debts

II. ACTIVITY RATIOS

1. Inventory Turnover (ITO)

●​Formula:
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
●​Basis: Higher = Better
●​Sign: X
𝐵𝑒𝑔 𝑖𝑛𝑣 + 𝐸𝑛𝑑 𝑖𝑛𝑣
●​Note: If beg inv and end inv were give, use the average = 2
●​What does the value mean:
○​High: Good
○​Low: Weak sales and overstocking of inventories
■​Recommendations: Better inventory management— improve marketing and sales, and
avoid overbuying
2. Average Age of Inventory (AAI)
●​Formula:
365 𝑑𝑎𝑦𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑔𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
●​Basis: Earlier = Better
●​Sign: days
●​Note: Use 365 days if the problem did not give specific days or when silent.
●​What does the value mean:
○​Earlier: Better
○​High: Inventories stays too long before being sold— slow sales and excess inventory
■​Recommendations: Improve demand forecasting, faster selling, reduce obsolete
stocks/inventory

3. Average Collection Period (ACP)

●​Formula:
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦
𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠
○​Where; 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦 = 365
●​Basis: Earlier = Better
●​Sign: days
●​Note: Use 365 days if the problem did not give specific days or when silent.
●​What does the value mean:
○​Earlier: Better
○​High: Slow collection— customers pay late or weak credit policy
■​Recommendations: Offer cash discounts, tighten credit terms, improve collection

4. Average Payment Period (APP)

●​Formula:
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑒𝑟 𝑑𝑎𝑦
𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
○​Where; 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑒𝑟 𝑑𝑎𝑦 = 365
●​Basis: Earlier = Better
●​Sign: days
●​Note: Use 365 days if the problem did not give specific days or when silent.
●​What does the value mean:
○​Earlier: Better
○​High: Liquidity problem— company is slow in paying suppliers (maybe due to poor cash
management that causes cash shortage)
■​Recommendations: Improve cash flow

5. Total Assets Turnover (TATO)

●​Formula:
𝑆𝑎𝑙𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
●​Basis: TATO > 1
●​Sign: X
●​What does the value mean:
○​Higher: Better
○​Low: Assets are not used efficiently to generate sales— maybe due to low sales volume
■​Recommendations: Improve asset utilization and increase sales
III. SOLVENCY RATIOS

1. Debt Ratio (DR)

●​Formula:
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
●​Basis: At least 40%-60%
●​Sign: % (ans×100 to get %)
●​What does the value mean:
○​40%-60%: Better
○​<40%: Too conservative— not using debt to grow operations— missed growth
opportunities
○​>60%: Heavily dependent on debt or too risky— weak solvency, higher chance of
bankruptcy, high interest burden.
■​Recommendation: aim to maintain an optimal mix of debt and equity to balance risk
and return.

2. Time Interest Earned Ratio (TIER)

●​Formula:
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥𝑒𝑠
𝑇𝑖𝑚𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 𝑅𝑎𝑡𝑖𝑜 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
●​Basis: Higher = better
●​Sign: X
●​Note: EBIT is the same as Operating Profit
●​What does the value mean:
○​Higher: Better
○​Low: Weak ability to pay interest— due to low operating profit or higher interest expenses
■​Recommendations: MinMax Approach

IV. PROFITABILITY RATIOS

1. Gross Profit Margin (GPM)

●​Formula:
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑆𝑎𝑙𝑒𝑠
●​Basis: Higher = better
●​Sign: % (ans×100 to get %)
●​Note: Gross Profit = Sales – COGS
●​What does the value mean:
○​Higher: Better
○​Low: High COGS and Low Pricing
■​Recommendations: Increase selling price and reduce production cost
2. Operating Profit Margin (OPM)
●​Formula:
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝐸𝐵𝐼𝑇
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑆𝑎𝑙𝑒𝑠
●​Basis: Higher = better
●​Sign: % (ans×100 to get %)
●​Note: Operating Profit or EBIT = Sales – COGS – OpEx
●​What does the value mean:
○​Higher: Better
○​Low: High OpEx
■​Recommendations: cut unnecessary expenses (control Opex)

3. Net Profit Margin (NPM)

●​Formula:
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑆𝑎𝑙𝑒𝑠
●​Basis: Higher = better
●​Sign: % (ans×100 to get %)
●​Note: EACS is the same as Net Income or Net Profit
●​What does the value mean:
○​Higher: Better
○​Low: High COGS, High OpEx, Low sales, high interest and taxes
■​Recommendations: Better pricing strategies, increase sales, and reduce costs

4. Earnings Per Share (EPS)

●​Formula:
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
●​Basis: Higher = better
●​Sign: $
●​Notes:
○​EACS is the same as Net Income or Net Profit
○​No. of shs of common stock outstanding is given.
●​What does the value mean:
○​Higher: Better
○​Low: Low net income or too many shares outstanding
■​Recommendations: Increase net income

5. Return on Total Assets (ROA) — (also called ROI (return on investments))

●​Formula:
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
●​Basis: Higher = better
●​Sign: % (ans×100 to get %)
●​Note: EACS is the same as Net Income or Net Profit
●​What does the value mean:
○​Higher: Better
 ○​Low: assets are not generating enough profit (low net income)
■​Recommendations: Utilize assets efficiently and increase profit

6. Return on Equity (ROE)

●​Formula:
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐶𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑒𝑞𝑢𝑖𝑡𝑦
●​Basis: Higher = better
●​Sign: % (ans×100 to get %)
●​Notes:
○​EACS is the same as Net Income or Net Profit
○​Common Stock Equity = Total Stockholder’s Equity – Preferred stocks
○​In Sole proprietorship and Partnership, Common Stock Equity is the Total Equity
●​What does the value mean:
○​Higher: Better
○​Low: Shareholder’s money are not used effectively which causes low net income
■​Recommendations: Improve asset utilization, increase profitability

V. MARKET RATIOS

1. Price Earnings (P/E) Ratio (P/E R)

●​Formula:
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘
𝑃𝑟𝑖𝑐𝑒/𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑅𝑎𝑡𝑖𝑜 = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 (𝐸𝑃𝑆)
●​Basis: Higher = better
●​Sign: X
●​Note: Use Selling Price or Fair Value if Market Price is not given
●​What does the value mean:
○​Higher: Better
○​Low: investors have low expectations about growth— Weak profitability and Poor market
confidence.
■​Recommendations: Improve earnings and Improve company performance & reputation

2. Market/Book (MB) Ratio (M/B R)

●​Formula:
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘
𝑀𝑎𝑟𝑘𝑒𝑡/𝐵𝑜𝑜𝑘 𝑅𝑎𝑡𝑖𝑜 = 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘
𝐶𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑒𝑞𝑢𝑖𝑡𝑦
○​Where; 𝐵𝑉 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
●​Basis: Higher = better
●​Sign: $
●​Notes:
○​Use Selling Price or Fair Value if Market Price is not given
○​Common Stock Equity = Total Stockholder’s Equity – Preferred stocks
○​In Sole proprietorship and Partnership, Common Stock Equity is the Total Equity
○​No. of shs of common stock outstanding is given.
●​What does the value mean:
○​Higher: Better
 ○​Low: market undervalues the company— Low ROE and Weak growth prospects
■​Recommendations: Improve profitability and Increase investor confidence

SUMMARY:
●​Generally, LOW is BAD:
○​CAUSE = low income/high cost/inefficient use/weak collection
○​RECO = increase sales, cut costs, manage assets & liabilities better

DUPONT SYSTEM OF ANALYSIS

●​The DuPont system of analysis is used to dissect the firm’s financial statements and to
assess its financial condition.
●​It merges the income statement and balance sheet into two summary measures of
profitability.
●​The Modified DuPont Formula relates the firm’s ROA to its ROE using the financial leverage
multiplier (FLM), which is the ratio of total assets to common stock equity:
●​The DuPont system first brings together the net profit margin, which measures the firm’s
profitability on sales, with its total asset turnover, which indicates how efficiently the firm has
used its assets to generate sales.
𝑅𝑂𝐴 = 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 × 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
●​Substituting the appropriate formulas into the equation and simplifying results in the formula
given earlier,
𝐸𝐴𝐶𝑆 𝑆𝑎𝑙𝑒𝑠 𝐸𝐴𝐶𝑆
𝑅𝑂𝐴 = 𝑆𝑎𝑙𝑒𝑠
× 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
= 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

MODIFIED DUPONT FORMULA

●​The modified DuPont Formula relates the firm’s return on total assets to its return on
common equity. The latter is calculated by multiplying the return on total assets (ROA) by the
financial leverage multiplier (FLM), which is the ratio of total assets to common stock
equity:
𝑅𝑂𝐸 = 𝑅𝑂𝐴 × 𝐹𝐿𝑀
●​Substituting the appropriate formulas into the equation and simplifying results in the formula
given earlier,
𝐸𝐴𝐶𝑆 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝐸𝐴𝐶𝑆
𝑅𝑂𝐸 = 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
× 𝐶𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑒𝑞𝑢𝑖𝑡𝑦
= 𝐶𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑒𝑞𝑢𝑖𝑡𝑦

EXAMPLE: RATIO ANALYSIS

INCOME STATEMENT
For the year ended December 31
2012 2011
Sales revenue $3,074,000 $2,567,000
Less: Cost of goods sold 2,088,000 1,711,000
Gross profit $986,000 $856,000
Less: Operating expenses
Selling expenses $100,000 $108,000
General and administrative expenses 194,000 187,000
Lease expenses 35,000 35,000
Depreciation expenses 239,000 223,000
 Total operating expenses $568,000 $553,000
Operating profit / Earnings before interest and taxes $418,000 $303,000
Less: Interest expense 93,000 91,000
Net profit before taxes $325,000 $212,000
Less: Taxes 94,000 64,000
Net profit after taxes / Net income / Net profit $231,000 $148,000
Less: preferred stock dividends 10,000 10,000
Earnings available for common stockholders $221,000 $138,000

Earnings per share (EPS) $2.90 $1.81

Dividends per share (DPS) $1.29 $0.75

BALANCE SHEET
December 31
ASSETS 2012 2011
Cash $ 363,000 $ 288,000
Marketable Securities 68,000 51,000
Accounts Receivable 503,000 365,000
Inventories 289,000 300,000
Total Current Assets $1,223,000 $1,004,0000
Land and buildings $2,072,000 $1,903,000
Machinery and Equipment 1,866,000 1,693,000
Furniture and Fixtures 358,000 316,000
Vehicles 275,000 314,000
Other (includes financial leases) 98,000 96,000
Total Gross fixed assets (at cost) $4,669,000 $4,322,000
Less: Accumulated Depreciation (2,295,000) (2,056,000)
Net fixed assets $2,374,000 $2,266,000
Total Assets $3,597,000 $3,270,000
LIABILITIES AND STOCKHOLDER’S EQUITY
Accounts Payable $382,000 $270,000
Notes Payable 79,000 99,000
Accruals 159,000 114,000
Total Current Liabilities $620,000 $483,000
Long term debt (includes financial leases) 1,023,000 967,000
Total Liabilities $1,643,000 $1,450,000
Preferred stock— cumulative 5%, $100 par, 2,000 shares $200,000 $200,000
authorized and issued
Common stock— $2.50 par, 100,000 shares authorized, 191,000 190,000
shares issued outstanding in 2012: 76,262; in 2011: 76,244
Paid-in capital in excess of par on common stock 428,000 418,000
Retained earnings 1,135,000 1,012,000
Total Stockholder’s equity $1,954,000 $1,820,000
Total Liabilities and Stockholder’s equity $3,597,000 $3,270,000
For the year 2012:
Given: Purchases = 70% of COGS
Common stock at the end of 2012 was selling at $32.25
 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 1,223,000
1. 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 620,000 = 1. 97𝑋
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 1,223,000 − 289,000
2. 𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 620,000
= 1. 51𝑋
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 2,088,000
3. 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
= 289,000 = 7. 22𝑋
365 𝑑𝑎𝑦𝑠 365
4. 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑔𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 7.22 = 50. 55 𝑑𝑎𝑦𝑠
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 503,000 503,000
5. 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦 = 3,074,000 = 8,422 = 59. 71 𝑑𝑎𝑦𝑠
365
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 382,000 382,000
6. 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑒𝑟 𝑑𝑎𝑦
= 70% × 2,088,000 = 4,004
= 95. 40 𝑑𝑎𝑦𝑠
365
𝑆𝑎𝑙𝑒𝑠 3,074,000
7. 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
= 3,597,000 = 0. 85𝑋
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 1,643,000
8. 𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 = 3,597,000 × 100 = 45. 68%
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥𝑒𝑠 418,000
9. 𝑇𝑖𝑚𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 𝑅𝑎𝑡𝑖𝑜 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
= 93,000 = 4. 49𝑋
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 986,000
10. 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑆𝑎𝑙𝑒𝑠
= 3,074,000 × 100 = 32. 08%
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝐸𝐵𝐼𝑇 418,000
11. 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑆𝑎𝑙𝑒𝑠
= 3,074,000 × 100 = 13. 60%
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 221,000
12. 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑆𝑎𝑙𝑒𝑠
= 3,074,000 × 100 = 7. 19%
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 221,000
13. 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 = 76,262 = $2. 90
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 221,000
14. 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
= 3,597,000 × 100 = 6. 14%
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 221,000
15. 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝐶𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑒𝑞𝑢𝑖𝑡𝑦
= 𝑇𝑜𝑡𝑎𝑙 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟'𝑠 𝑒𝑞𝑢𝑖𝑡𝑦−𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑡𝑜𝑐𝑘
221,000 221,000
𝑅𝑂𝐴 = 1,954,000−200,000 = 1,754,000 × 100 = 12. 60%
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 32.25
16. 𝑃𝑟𝑖𝑐𝑒/𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑅𝑎𝑡𝑖𝑜 = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 (𝐸𝑃𝑆)
= 2.90 = 11. 12𝑋
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘
17. 𝑀𝑎𝑟𝑘𝑒𝑡/𝐵𝑜𝑜𝑘 𝑅𝑎𝑡𝑖𝑜 = 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 = 𝐶𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑒𝑞𝑢𝑖𝑡𝑦
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
32.25 32.25
𝑀𝐵𝑅 = 1,754,000 = 23
= $1. 40
76,262

18. 𝐷𝑢𝑃𝑜𝑛𝑡 𝑅𝑂𝐴 = 𝑁𝑃𝑀 × 𝑇𝐴𝑇𝑂 = 7. 19% × 0. 85𝑋 = 6. 11%

𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 3,597,000
19. 𝐷𝑢𝑃𝑜𝑛𝑡 𝑅𝑂𝐸 = 𝑅𝑂𝐴 × 𝐹𝐿𝑀 = 6. 11% × 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑒𝑞𝑢𝑖𝑡𝑦
= 6. 11% × 1,754,000
= 12. 53%

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