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Financial Ratio Analysis Examples

The document provides 3 sample problems calculating financial ratios from information given about companies' operating profits, assets, liabilities, and income. The first problem calculates return on investment ratios for 3 divisions of a company based on their operating profits and average asset values to determine which division is most profitable. The second problem calculates return on assets for a construction company using its beginning assets, ending assets, and net income. The third problem calculates a debt ratio for a guitar shop using its total assets and total liabilities.

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Matthew Josh Altarez
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88 views2 pages

Financial Ratio Analysis Examples

The document provides 3 sample problems calculating financial ratios from information given about companies' operating profits, assets, liabilities, and income. The first problem calculates return on investment ratios for 3 divisions of a company based on their operating profits and average asset values to determine which division is most profitable. The second problem calculates return on assets for a construction company using its beginning assets, ending assets, and net income. The third problem calculates a debt ratio for a guitar shop using its total assets and total liabilities.

Uploaded by

Matthew Josh Altarez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

SAMPLE PROBLEMS ON FINANCIAL

RATIOS

1. The management of International Heal Medical Company is evaluating the performance of


its three (3) divisions. The Booboo Division had operating profit of ₱24,950 and on average
used assets with a book value of ₱311,900. The Splint Division had an operating profit of
₱17,500 and used average assets of ₱177,950. The Intensive Care Division had an
operating profit of ₱28,500 and average assets of ₱475,000. The company is planning to
award the Intensive Care Division relying on its high operating profit. Should the
management continue with this decision? Justify your answer.

Answer:
ROI = Income after Income tax
Average Stockholder’s Equity
Booboo division operating profits ₱24,950
Average used assets book value ₱311,900
Sprint division operating profit ₱17,500
Used average asset ₱177,950
Intensive care division operating profit ₱28,500
Average asset ₱475,000

Booboo division operating profits ₱24,950


X 100 = 8%
₱311,900
Average used assets book value

Sprint Division operating profit ₱17,500 X 100 = 10%


₱177,950
Used average asset

Intensive Care division operating profit ₱28,500


X 100 = 6%
₱475,000
Average asset
2. Charlie’s Construction Company is a growing construction business that has a few
contracts to build storefronts in Pasay. Charlie’s balance sheet shows beginning
assets of ₱1,000,000 and an ending balance of ₱2,000,000 of assets. During the
current year, Charlie’s company had a net income of ₱20,000,000. Compute for the
company’s return on assets and interpret the results.

Answer:

ROA = Income
Average Total Asset

Beginning asset + Ending balance


2

Beginning asset ₱1,000,000

Ending balance ₱2,000,000

Net income ₱20,000,000

₱1,000,000+₱2,000,000
2
= ₱ 3,000,000
2
= ₱ 1,500,000
₱20,000,000
= 13.33
₱ 1,500,000

3. Dave’s Guitar Shop is thinking about building an addition onto the back of its existing building for
more storage. Dave consults with his banker about applying for a new loan. The bank asks for
Dave’s balance to examine his overall debt levels. The banker discovers that Dave has total
assets of ₱5,000,000 and total liabilities of ₱25,000. Compute for Dave’s debt ratio.

Answer:
Dept ratio = Total Liabilities
Total asset
Total assets ₱5,000,000

Total Liabilities ₱25,000

₱25,000
= 0.05
₱5,000,000

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