accounting final project0

8/7/2019 Accounting Final Project0

1/33

Group # 5

Raeesa Gul Khan, Muhammad Arsla

Azeem Farrukh, Muhammad Idrees

Problem # 12-32

Computation Of Accounting Ratios

(All The Amounts Are Dollars $ In Million, Except Per

1. Current Ratio:-

Definition:-

It is a ratio that is used to compute the ability of the company to pay of its current lia

Solution:-

Current Ratio =Current Assets

Current Liabilities

Current Ratio =15,220

12,358

= 1.23

Analysis:-

If the current ratio is high then, the company will be more capable to pay-off

A cuurrent ratio of the company shows that it would not ba pay-off its liabilities bec

2. Quick Ratio:-

Definition:-

Solution:-

It is a ratio which determines that a company has enough short-term assets tliabilities without selling an inventory.


2/33

Quick Ratio =Quick Assets Quick Assets = Current A

Current Liabilities = 15,220

= 7,9

Quick Ratio =11,580

12,358

= 0.94

Analysis:-

If Business quick ratio is 1:1, it is considered to be having good current fi

3. Average Collection Period

Definition:-

The approximate time period which a company takes to receive the payment s from the

Solution:-

Average Collection Period =

365

Accounts Receivable Turnover

Accounts Receivable Turnover =Credit Sales

Average Accounts Receivable

Aver

Accounts Receivable Turnover =43377

(3090 + 3038) /2

= 14.15

Average Collection Period =365

14.15

= 26 Days

Analysis:-

The Quick Ratio of company is lower than the Current Ratio and standard quick ratiocompany are dependent on Inventory.

Higher Turnover signifies speedy & effective collection, on the other hand lower tu


3/33

4. Total Debts To Total Assets:-

Definition:-

Solution:-

Total Debt To Total Assets =Total Debt

X 100Total Assets

Total Debt To Total Assets =27,520

X 10043,706

= 0.63

Analysis:-

This ratio shows that the company have more assets than the liabilities or liabilities

5. Total Debt To Equity:-

Definition:-

This ratio indicates what proportion of equity and debt the company is using

Solution:-

Total Debt To Equity =Total Liabilities

Stockholders Equity

Total Debt To Equity =27,520

16,186

= 1.7

collection from the customers

A ratio which is used to compute a financial risk of a company by determof the assets have been financed by debt.

A debt ratio of greater than 1 indicates that a company has more debt

A debt ratio of less than 1 indicates that a company has more assets


4/33

Analysis:-

When debt/equity ratio is high, it means that a company is aggressive in fina

More the borrowing and less the stockholder's equity,the risk is to lend m

This ratio shows that the company have more borrowing / debt than the equ

6. Interest Coverage Ratio:-

Definition:-

It is a ratio used to determine how easily a company can pay interest on its

Solution:-

Interest Coverage Ratio =Net Income Before Interest & Taxes

Interest Expense

Interest Coverage Ratio =8,091

561

= 14.42

Analysis:-

The ratio of the company shows that the company is not much burdened b

7. Return On Common Stockholder's Equity:-

Definition:-

Solution:-

Return On Common Stockholder's Equity =Net Income - Preferre

Average Common Stock

Lower the ratio, more the company is burdened by debt exp

An interest coverage ratio below 1 indicates that the company is not genrevenues to satisfy the interest expenses of the company

This ratioshows the return to common stockholders after the payment of


5/33

Return On Common Stockholder's Equity =5,186 - 125

(14,606 + 12,072)/2

= 37.94%

Analysis:-

For high growth, companies should expect a higher Return on

Averaging Return on Equity over the past 5-10 years can give a better idea of

8.Gross Profit Ratio:-

Definition:-

Solution:-

Gross Profit Rate =Gross Profit

X 100Net Sales

Gross Profit Rate =21,236

X 10043,377

= 48.96%

Analysis:-

Without an adequate gross margin, a company will be unable to pay its operati

In general, a company's gross profit margin should be stabl

This gross profit ratio of the company shows the normal position of finance

9. Return On Sales:-

A return on equity of over 10% indicates enough to pay common share dividfor business growth

This ratio shows the margin of profit that a business is able to eaTrading and Manufacturing activities

The gross margin is not an exact estimate of the company's pricing strategy bindication of financial health


6/33

Definition:-

This type of ratio is widely used to evaluate/calculate a company's opera

Solution:-

Return On Sales = Net Income X 100Total Sales

Return On Sales =5,186

X 10043,377

= 11.96%

Analysis:-

Return on Sale is a useful measure of a company's operational efficiency as w

10. Assets Turnover Ratio:-

Definition:-

Solution:-

Assets Turnover =Sales

Avg. Total Assets

Assets Turnover = 43,377(43,706 + 40,776)/2

= 1.03

Analysis:-

An increasing ROS indicates the company is growing more efficient, while a decould signal looming financial troubles.

It reflects how well company manage its cost, and how it responds to difficulties like acosts and a fall in prices

Asset turnover ratio shows an investor the total sales for each $1

Higher the number the better it is companies with low profit margins tend to have high


7/33

11. Return On Assets:-

Definition:-

Return on assets shows to the investor that how much profit a company generated

Solution:-

Return On Assets =Earning Before Income & Tax

X 100Average Total Assets

Return On Assets =8,091

X 100(43,706 + 40,776)/2

= 19.15%

Analysis:-

Return On Assets ratio above 20% indicates that the company is a

12. Earning Per Share:-

Definition:-

Solution:-

Earning Per Share =Net Income - Preferred Dividends

Average Number of Common Shares Outstan

Earning Per Share =5186 - 125

1296

high profit margins have low asset turnover.

A high Return On Assets ratio indicates that the business is earning minvesting less on assets.

In the industry, as a general rule, Return On Assets ratio below 5% indicatehas a very heavy assets

The portion of a company's profit allocated to each outstanding share of commshare serves as an indicator of a company's profitability.


8/33

= 3.91 Per Share

Analysis:-

Earnings per share allows us to compare different companies power to

The higher the earnings per share with all else equal, the higher each share

13. Price Earning Ratio:-

Definition:-

Current share price ratio is a valuation ratio of a company compared to compa

Solution:-

Price Earning =Market Price of Common Shar

Earning Per Share

Price Earning =88.3

3.9

= 22.641

Analysis:-

This price earning ratio of the company shows that the company earn

14. Dividend Yeild Ratio:-

Definition:-

Earnings per share is generally considered to be the single most important va

a price of per share which shows in the balance sheet in foot notes or in share

In general, a high Price Earning suggests the investors are expectingfuture

It's usually more useful to compare the Price Earning ratios of oncompanies

The Dividend Yield Ratio shows the amount of dividends that a cinvestors in comparison to the market price of its


9/33

Solution:-

Dividend Yield Ratio =Dividend Per Common Share

X 100Market Price of Common shar

Dividend Yield Ratio = 1.64 X 10088.3

= 1.85%

Analysis:-

dicates future dividend payments might actually be higher than the c

Shows the company is relatively financially stab

15. Dividend Payout Ratio:-

Definition:-

Solution:-

ividend Payout ShareDividend Per Common Share

X 100Earning Per share

Dividend Payout Share =1.64

X 1003.9

= 42.10%

Analysis:-

The Payout Ratio provides an idea of how well earnings support th

The payout ratio of the company shows that the payment of the loans r

Shows that stock is underpriced (less than its real

Shows that stock is overpriced (more than its real

Shows the company has been hit hard in times of economic depressio

Indicates future dividend payments may NOT be as high as t

The percentage of earnings paid to shareholders in dividends is called

More mature companies tend to have a higher Payo


10/33

16. Market To Book Value Ratio:-

Definition:-

Market Value

Book Value

Solution:-

arket To Book ValueMarket Price of Common Share

Book Value Per Common Share

Book Value Per Common Share =Total StockHolders Equity - Book

Number of Common

Book Value Per Common Share =

16186 - 1580 = 11.26

1297

Market To Book Value =88.3

11.26

= 7.842

Analysis:-

This ratio of the company shows that the market value of per share is greater than

The current quoted price at which investors buy or sell a share obond at a given time. Also known as "Market Pri

The initial outlay for an investment. This number may be net or grotrading costs, sales taxes, service charges and so

In the context of securities, Market Value is often different from book valueinto account future growth potential.

Most investors who use fundamental analysis to pick stocks look at a compadetermine whether or not the market value is adequ


11/33

Final Project And TermFall Se


12/33

Share Data)

ilities with its current assets

its current liabilities

use the standard ratio is 2:1

pay-off its current


13/33

sets - Inventory

- 3,640

40

nancial position.

ir customers, client or debtors

ge Accounts Receivable = Opening A/R + Closing A/R / 2

, means CurrentAssets of the

rnover signifies ineffective


14/33

are 63% of the total assets

to finance its assets.

ining how much

than assets.

than debt.


15/33

ncing through debt.

oney to the firm

ity of the company

outstanding debts.

the debt expense

d DividendsX 100

older's Equity

nse

erating enough

preferred shares


16/33

X 100

quity

the historical growth

g and other expenses

e.

/ financial position

nds and retain funds

n on its

t, it does give a good


17/33

ional efficiency

ell as its profitability

creasing Return on sale

goin down of sales, increasing

of assets

sset turnover,while those with


18/33

for each $1 of assets

sset-light.

ing

re money and

s that the company

on stock. Earnings per


19/33

make money.

should be worth.

y's pre-share earning

s much more

iable in determining

olders equity section

igher earnings growth in

e company to other

ompany pays to itstock.


20/33

urrent dividend payments

le.

dividend payments.

atio is normal

alue).

alue).

n and financial hardship.

he current one.

"Dividend Payout Ratio"

t Ratio.


21/33

alue of Preferred Stock

hares Outstanding

the book value per share

common stock or ae"

s of expenses such ason.

because the market takes

ny's market value and thenate


22/33

aper Submitted By Group # 5ester 2010


23/33


24/33


25/33


26/33


27/33


28/33


29/33


30/33


31/33


32/33


33/33

accounting final project0

Documents