Financial Statement Analysis Module 3
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Eau Claire DomingoFinancial Statement Analysis Module 3
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Eau Claire DomingoCommon questions
Powered by AIThe increase in retained earnings from ₱70,000 in 2019 to ₱110,000 in 2020 indicates that Albert Company has been profitable and has opted to retain a portion of its earnings rather than distribute them all as dividends. This increase reflects positively on financial stability, suggesting the company is building reserve capital for future investments or to cushion against potential losses.
Harry Computer Company's current ratio is calculated as total current assets (₱655,000) divided by total current liabilities (₱330,000), resulting in approximately 1.98. This is slightly below the industry average of 2.0x. The quick ratio, factoring in more liquid resources, would also be below the industry benchmark of 1.3x. These suggest Harry is slightly less liquid than the industry average, indicating potential short-term financial pressures.
Albert Company's net interest coverage ratio, also known as times interest earned, is calculated by dividing EBIT (Income before income tax and interest) by interest expense. With EBIT of ₱108,000 and interest expense of ₱18,000, the coverage is 6 times. This indicates that Albert is generating substantial earnings against its interest obligations, which implies lower lending risk and stronger financial stability. A ratio significantly above 1 suggests reliable capacity for debt service, assuring creditors of timely interest payments.
The inventory turnover ratio, which compares cost of goods sold to average inventory levels, indicates the frequency at which inventory is sold and replaced over a period. A higher ratio implies efficient inventory management and reduced cash conversion cycle, leading to improved liquidity and operational cash flow. If Harry's ratio approaches or exceeds the industry standard of 6.7 times, it would suggest proficient management of stock levels and potentially faster release of cash tied up in inventory, thus optimizing operating cycles.
If cash dividends were not declared, Albert Company's net cash provided by operating activities would remain at ₱60,000, unaffected by dividend payments. However, cash outflows related to financing activities reflecting dividend payments of ₱23,000 would not appear, suggesting higher net cash contributions from financing activities. This would indicate enhanced cash flow retained for operational reinvestments or future expansions.
The return on equity (ROE) for Albert Company is calculated using net income divided by average shareholder's equity. With a net income of ₱63,000 and shareholders' equity accounting for the average common stock and beginning retained earnings over 2019 and 2020, the ROE reflects the firm's efficiency in converting the equity capital into generated profits. A higher proportional ROE suggests superior ability in generating shareholder value.
The price-earnings (P/E) ratio is calculated by dividing the market value per share by the earnings per share (EPS). For Albert Company, with a market value of ₱21 per share and the net income of ₱63,000 for 30,000 shares, the EPS is ₱2.10. Thus, P/E ratio is 21/2.10 ≈ 10. This ratio informs investors about the market's expectations of future earnings growth and whether the stock is over or undervalued. A relatively high P/E ratio could suggest that the stock is overvalued, or investors expect higher growth rates in the future.
Harry Computer Company's debt ratio can be illustrated by their total liabilities divided by total assets, resulting in a debt-to-total capital ratio of approximately 47%. This suggests a moderate use of debt in their capital structure, compared to an acceptable industry range, implying a balanced approach to leveraging debt. This could positively impact Harry’s ability to finance operations and expansions while keeping financial risk in check.
The operational efficiency of Harry Computer Company can be assessed through its gross profit margin, where gross profit is ₱215,000 on sales of ₱1,607,500, yielding a margin of approximately 13.4%. Compared to the industry’s profit margin of 1.2%, Harry is performing better operationally. This suggests Harry either controls costs more effectively or yields higher productivity levels from its inputs compared to competitors.
The asset turnover ratio is calculated as Net Sales divided by Total Assets. For Albert Company, this would be ₱400,000 in net sales divided by the average total assets for 2020 and 2019. Calculating this provides a measure of how efficiently the company uses its assets to generate sales. The higher the ratio, the more efficient the company is at using its assets to generate revenue.