Professional Documents
Culture Documents
CHAPTER 5
FINANCIAL STATEMENTS ANALYSIS - II
I.
Questions
1. By looking at trends, an analyst hopes to get some idea of whether a
situation is improving, remaining the same, or deteriorating. Such
analyses can provide insight into what is likely to happen in the future.
Rather than looking at trends, an analyst may compare one company to
another or to industry averages using common-size financial statements.
2. Ratios highlight relationships, movements, and trends that are very
difficult to perceive looking at the raw underlying data standing alone.
Also, ratios make financial data easier to grasp by putting the data into
perspective. As to the limitation in the use of ratios, refer to page 129.
3. Price-earnings ratios are determined by how investors see a firms future
prospects. Current reported earnings are generally considered to be useful
only so far as they can assist investors in judging what will happen in the
future. For this reason, two firms might have the same current earnings,
but one might have a much higher price-earnings ratio if investors view it
to have superior future prospects. In some cases, firms with very small
current earnings enjoy very high price-earnings ratios. This is simply
because investors view these firms as having very favorable prospects for
earnings in future years. By definition, a stock with current earnings of
P4 and a price-earnings ratio of 20 would be selling for P80 per share.
4. A managers financing responsibilities relate to the acquisition of assets
for use in his or her company. The acquisition of assets can be financed in
a number of ways, including through issue of ordinary shares, through
issue of preference shares, through issue of long-term debt, through
leasing, etc. A managers operating responsibilities relate to how these
assets are used once they have been acquired. The return on total assets
ratio is designed to measure how well a manager is discharging his or her
operating responsibilities. It does this by looking at a companys income
before any consideration is given as to how the income will be distributed
among capital resources, i.e., before interest deductions.
5. Financial leverage, as the term is used in business practice, means
obtaining funds from investment sources that require a fixed annual rate
5-1
3. True
4. False
5. True
6. True
7. True
8. True
9. False
10. False
III. Problems
Problem 1 (Common Size Income Statements)
Common size income statements for 2005 and 2006:
Sales.................................................
Cost of goods sold.............................
Gross profit.......................................
Operating expenses...........................
Net income........................................
2006
100%
66
34%
28
6%
2005
100%
67
33%
29
4%
The changes from 2005 to 2006 are all favorable. Sales increased and the
gross profit per peso of sales also increased. These two factors led to a
substantial increase in gross profit. Although operating expenses increased in
peso amount, the operating expenses per peso of sales decreased from 29 cents
to 28 cents. The combination of these three favorable factors caused net
income to rise from 4 cents to 6 cents out of each peso of sales.
Problem 2 (Measures of Liquidity)
Requirement (a)
Current assets:
Cash
Marketable securities
P 47,600
175,040
5-4
Accounts receivable
Inventory
Unexpired insurance
Total current assets
Current liabilities:
Notes payable
Accounts payable
Salaries payable
Income taxes payable
Unearned revenue
Total current liabilities
230,540
179,600
4,500
P637,280
P 70,000
125,430
7,570
14,600
10,000
P227,600
Requirement (b)
The current ratio is 2.8 to 1. It is computed by dividing the current assets of
P637,280 by the current liabilities of P227,600. The amount of working
capital is P409,680, computed by subtracting the current liabilities of
P227,600 from the current assets of P637,280.
The company appears to be in a strong position as to short-run debt-paying
ability. It has almost three pesos of current assets for each peso of current
liabilities. Even if some losses should be sustained in the sale of the
merchandise on hand or in the collection of the accounts receivable, it appears
probable that the company would still be able to pay its debts as they fall due
in the near future. Of course, additional information, such as the credit terms
on the accounts receivable, would be helpful in a careful evaluation of the
companys current position.
Problem 3 (Common-Size Income Statement)
Requirement 1
2006
2005
Sales
100.0 %
100.0 %
Less cost of goods sold...........................................................................................................
63.2
60.0
Gross margin..........................................................................................................................
36.8
40.0
Selling expenses.....................................................................................................................
18.0
17.5
Administrative expenses........................................................................................................
13.6
14.6
Total expenses........................................................................................................................
31.6
32.1
Net operating income............................................................................................................
5.2
7.9
Interest expense.....................................................................................................................
1.4
1.0
Net income before taxes.........................................................................................................
3.8 %
6.9 %
Requirement 2
5-5
The companys major problem seems to be the increase in cost of goods sold,
which increased from 60.0% of sales in 2005 to 63.2% of sales in 2006. This
suggests that the company is not passing the increases in costs of its products
on to its customers. As a result, cost of goods sold as a percentage of sales
has increased and gross margin has decreased. Selling expenses and interest
expense have both increased slightly during the year, which suggests that costs
generally are going up in the company. The only exception is the
administrative expenses, which have decreased from 14.6% of sales in 2005 to
13.6% of sales in 2006. This probably is a result of the companys efforts to
reduce administrative expenses during the year.
Problem 4 (Comparing Operating Results with Average Performance in
the Industry)
Requirement (a)
Ms. Freeze,Inc.
100%
49
51%
Sales (net)
Cost of goods sold
Gross profit on sales
Operating expenses:
Selling
General and administrative
Total operating expenses
Operating income
Income taxes
Net income
21%
17
38%
13%
6
7%
Industry Average
100%
57
43%
16%
20
36%
7%
3
4%
Requirement (b)
Ms. Freezes operating results are significantly better than the average
performance within the industry. As a percentage of sales revenue, Ms.
Freezes operating income and net income after nearly twice the average for
the industry. As a percentage of total assets, Ms. Freezes profits amount to
an impressive 23% as compared to 14% for the industry.
The key to Ms. Freezes success seems to be its ability to earn a relatively
high rate of gross profit. Ms. Freezes exceptional gross profit rate (51%)
probably results from a combination of factors, such as an ability to command
a premium price for the companys products and production efficiencies which
lead to lower manufacturing costs.
As a percentage of sales, Ms. Freezes selling expenses are five points higher
than the industry average (21% compared to 16%). However, these higher
expenses may explain Ms. Freezes ability to command a premium price for
its products. Since the companys gross profit rate exceeds the industry
5-6
Sales.........................................................
Less cost of goods sold.............................
Gross margin............................................
Less operating expenses............................
Net operating income................................
Less interest expense................................
Net income before taxes............................
Less income taxes (30%)..........................
Net income...............................................
2006
100.0%
65.0
35.0
26.3
8.7
1.2
7.5
2.3
5.3%
2005
100.0%
60.0
40.0
30.4
9.6
1.6
8.0
2.4
5.6%
2.0%
2005
5.1%
15.0
10.1
30.1
15.2
1.0
1.3
48.1
31.6
51.9
100.0%
68.4
100.0%
Liabilities:
Current liabilities...............................
Bonds payable, 12%...........................
25.1%
20.1
12.7%
25.3
5-7
Total liabilities.............................
Equity:
Preference shares, 8%, P10 par
45.1
38.0
15.0
19.0
10.0
12.7
Retained earnings
29.8
30.4
54.9
62.0
100.0%
100.0%
Total equity
Total liabilities and equity.........................
Note: Columns do not total down in all cases due to rounding differences.
Requirement 2
The companys cost of goods sold has increased from 60 percent of sales in
2005 to 65 percent of sales in 2006. This appears to be the major reason the
companys profits showed so little increase between the two years. Some
benefits were realized from the companys cost-cutting efforts, as evidenced by
the fact that operating expenses were only 26.3 percent of sales in 2006 as
compared to 30.4 percent in 2005. Unfortunately, this reduction in operating
expenses was not enough to offset the increase in cost of goods sold. As a
result, the companys net income declined from 5.6 percent of sales in 2005 to
5.3 percent of sales in 2006.
74.8
152.7
1,191.8
95.5
P1,514.8
Quick assets:
5-8
Cash
Receivables
Total quick assets
74.8
152.7
P 227.5
Requirement (b)
(1) Current ratio:
Current assets (Req. a)
Current liabilities
Current ratio (P1,514.8 P1,939.0)
P1,514.8
P1,939.0
0.8 to 1
P 227.5
P1,939.0
0.1 to 1
P1,514.8
P1,939.0
P(424.2)
Requirement (c)
No. It is difficult to draw conclusions from the above ratios. Alabang
Supermarkets current ratio and quick ratio are well below safe levels,
according to traditional rules of thumb. On the other hand, some large
companies with steady ash flows are able to operate successfully with current
ratios lower than Alabang Supermarkets.
Requirement (d)
Due to characteristics of the industry, supermarkets tend to have smaller
amounts of current assets and quick assets than other types of merchandising
companies. An inventory of food has a short shelf life. Therefore, the
inventory of a supermarket usually represents only a few weeks sales. Other
merchandising companies may stock inventories representing several months
sales. Also, supermarkets sell primarily for cash. Thus, they have relatively
few receivables. Although supermarkets may generate large amounts of cash,
it is not profitable for them to hold assets in this form. Therefore, they are
likely to reinvest their cash flows in business operations as quickly as
possible.
Requirement (e)
5-9
P 47,524
55,926
23,553
P127,003
P 47,524
55,926
23,553
32,210
5,736
P164,949
P 20,000
5,912
1,424
21,532
6,438
P 55,306
Requirement (b)
5-10
P127,003
P 55,306
2.3 to 1
P164,949
P 55,306
3.0 to 1
P164,949
55,306
P109,643
P 81,630
P353,816
23.1%
Requirement (c)
(1) From the viewpoint of short-term creditors, Bonbon Sweets appear
highly liquid. Its quick and current ratios are well above normal rules of
thumb, and the companys cash and marketable securities alone are almost
twice its current liabilities.
(2) Long-term creditors also have little to worry about. Not only is the
company highly liquid, but creditors claims amount to only 23.1% of
total assets. If Bonbon Sweets were to go out of business and liquidate
its assets, it would have to raise only 23 cents from every peso of assets
for creditors to emerge intact.
(3) From the viewpoint of shareholders, Bonbon Sweets appears overly
liquid. Current assets generally do not generate high rates of return.
Thus, the companys relatively large holdings of current assets dilutes its
return on total assets. This should be of concern to shareholders. If
Bonbon Sweets is unable to invest its highly liquid assets more
productively in its business, shareholders probably would like to see the
money distributed as dividends.
5-11
Acid-test ratio =
P80,000 + P0 + P460,000
P520,000
= 1.04 to 1 (rounded)
Requirement 3
a. Working capital would not be affected:
Current assets (P1,300,000 P100,000).................................................................
P1,200,000
Current liabilities (P520,000 P100,000)...............................................................
420,000
Working capital.......................................................................................................
P 780,000
b. The current ratio would rise:
Current ratio
Current rate
Current assets
Current liabilities
P1,200,000
P420,000
= 2.9 to 1 (rounded)
P840,000
P2,100,000
5-12
= 40%
2. Current ratio:
Current assets
Current liabilities
P490,000
P200,000
= 2.45 to 1
3. Acid-test ratio:
Quick assets
Current liabilities
P181,000
P200,000
= 0.91 to 1 (rounded)
365 days
14 times
P2,100,000
P150,000
= 14 times
5. Inventory turnover:
Cost of goods sold
Average inventory
365 days
4.5 times
P1,260,000
P280,000
= 4.5 times
6. Debt-to-equity ratio:
Total liabilities
Total equity
P500,000
P800,000
= 0.63 to 1 (rounded)
P180,000
P30,000
P800,000
20,000 shares*
= 6.0 times
* P100,000 total par value P5 par value per share = 20,000 shares
P105,000
20,000 shares
P3.15
P5.25
= 60%
P3.15
P63.00
= 5%
P63.00
P5.25
= 12.0
P126,000
P1,200,000
= 10.5%
=
=
=
= 13.8% (rounded)
3. Financial leverage was positive, since the rate of return to the ordinary
shareholders (13.8%) was greater than the rate of return on total assets
(10.5%). This positive leverage is traceable in part to the companys
current liabilities, which may carry no interest cost, and to the bonds
payable, which have an after-tax interest cost of only 7%.
10% interest rate (1 0.30) = 7% after-tax cost.
=
=
= 1.04 (rounded)
Requirement (3)
a. Working capital would not be affected by a P100,000 payment on
accounts payable:
Current assets (P1,300,000 P100,000)................................
P1,200,000
Current liabilities (P520,000 P100,000).............................. 420,000
P 780,000
Working capital......................................................................
b. The current ratio would increase if the company makes a P100,000
payment on accounts payable:
5-15
Current ratio
Current assets
Current liabilities
P1,200,000
P420,000
= 2.9 (rounded)
2. No effect
3. Increase
4. No effect
5. Decrease
6. Decrease
7. Increase
current liabilities.
8. No effect
9. Decrease
10. Increase
11. Increase
12. Increase
13. No effect
14. Decrease
15. No effect
16. Decrease
17. Increase
18. Decrease
equity.
Problem 14 (Interpretation of Financial Ratios)
a. The market price is going down. The dividends paid per share over the
three-year period are unchanged, but the dividend yield is going up.
Therefore, the market price per share of stock must be decreasing.
b. The earnings per share is increasing. Again, the dividends paid per share
have remained constant. However, the dividend payout ratio is decreasing.
In order for the dividend payout ratio to be decreasing, the earnings per
share must be increasing.
c. The price-earnings ratio is going down. If the market price of the stock is
going down [see part (a) above], and the earnings per share are going up
[see part (b) above], then the price-earnings ratio must be decreasing.
d. In Year 1, leverage was negative because in that year the return on total
assets exceeded the return on ordinary equity. In Year 2 and in Year 3,
leverage was positive because in those years the return on ordinary equity
exceeded the return on total assets employed.
e. It is becoming more difficult for the company to pay its bills as they come
due. Although the current ratio has improved over the three years, the
acid-test ratio is down. Also note that the accounts receivable and
inventory are both turning more slowly, indicating that an increasing
portion of the current assets is being made up of those items, from which
bills cannot be paid.
f.
Customers are paying their bills more slowly in Year 3 than in Year 1.
This is evidenced by the decline in accounts receivable turnover.
Last Year
P1,470,000
600,000
P 870,000
P2,060,000
P1,100,000
1.87 to 1
P1,470,000
P600,000
2.45 to 1
P740,000
P1,100,000
0.67 to 1
P650,000
P600,000
1.08 to 1
P7,000,000
P525,000
13.3 times
P6,000,000
P375,000
16.0 times
27.4 days
22.8 days
P5,400,000
P1,050,000
5.1 times
P4,800,000
P760,000
6.3 times
71.6 days
P1,850,000
P2,150,000
0.86 to 1
57.9 days
P1,350,000
P1,950,000
0.69 to 1
P630,000
P90,000
7.0 times
P490,000
P90,000
5.4 times
a. Current assets
Current liabilities
Working capital
f.
5-19
Current assets:
Cash
Marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Plant and equipment, net
Total assets
Liabilities:
Current liabilities
Bonds payable, 12%
Total liabilities
Equity:
Preference shares, P50 par, 8%
Ordinary shares, P10 par
Retained earnings
Total equity
Total liabilities and equity
This Year
Last Year
2.3 %
0.0
16.3
32.5
0.5
51.5
48.5
100.0 %
6.1 %
1.5
12.1
24.2
0.6
44.5
55.5
100.0 %
27.5 %
18.8
46.3
18.2 %
22.7
40.9
5.0
12.5
36.3
53.8
100.0 %
6.1
15.2
37.9
59.1
100.0 %
Sales
Less cost of goods sold
Gross margin
Less operating expenses
Net operating income
Less interest expense
Net income before taxes
Less income taxes
Net income
Last Year
100.0 %
80.0
20.0
11.8
8.2
1.5
6.7
2.7
4.0 %
Requirement 3
The following points can be made from the analytical work in parts (1) and (2)
above:
5-20
The company has improved its profit margin from last year. This is
attributable to an increase in gross margin, which is offset somewhat by an
increase in operating expenses. In both years the companys net income as a
percentage of sales equals or exceeds the industry average of 4%.
Although the companys working capital has increased, its current position
actually has deteriorated significantly since last year. Both the current ratio
and the acid-test ratio are well below the industry average, and both are
trending downward. (This shows the importance of not just looking at the
working capital in assessing the financial strength of a company.) Given the
present trend, it soon will be impossible for the company to pay its bills as
they come due.
The drain on the cash account seems to be a result mostly of a large buildup in
accounts receivable and inventory. This is evident both from the common-size
balance sheet and from the financial ratios. Notice that the average age of the
receivables has increased by 5 days since last year, and that it is now 9 days
over the industry average. Many of the companys customers are not taking
their discounts, since the average collection period is 27 days and collection
terms are 2/10, n/30. This suggests financial weakness on the part of these
customers, or sales to customers who are poor credit risks. Perhaps the
company has been too aggressive in expanding its sales.
The inventory turned only 5 times this year as compared to over 6 times last
year. It takes three weeks longer for the company to turn its inventory than the
average for the industry (71 days as compared to 50 days for the industry).
This suggests that inventory stocks are higher than they need to be.
In the authors opinion, the loan should be approved on the condition that the
company take immediate steps to get its accounts receivable and inventory
back under control.
This would mean more rigorous checks of
creditworthiness before sales are made and perhaps paring out of slow paying
customers. It would also mean a sharp reduction of inventory levels to a more
manageable size. If these steps are taken, it appears that sufficient funds
could be generated to repay the loan in a reasonable period of time.
Case 2 (Financial Ratios for Ordinary Shareholders)
Requirement 1
a.
This Year
5-21
Last Year
Net income
Less preference dividends
Net income remaining for ordinary (a)
P324,000
16,000
P240,000
16,000
P308,000
P224,000
50,000
P6.16
50,000
P4.48
P2.16
P45.00
4.8%
P1.20
P36.00
3.33%
5-22
Requirement 2
a.
This Year
Last Year
P 324,000
P 240,000
Net income..............................................................................................................
Add after-tax cost of interest paid:
[P90,000 (1 0.40)].........................................................................................
54,000
54,000
P 294,000
Total (a)...................................................................................................................
P 378,000
Average total assets (b)............................................................................................
P3,650,000
P3,000,000
Return on total assets (a) (b)................................................................................
10.4%
9.8%
b.
This Year
Last Year
P 324,000
P 240,000
Net income..............................................................................................................
Less preference dividends........................................................................................
16,000
16,000
Net income remaining for ordinary
P 308,000
P 224,000
shareholders (a)...................................................................................................
Average total equity*...............................................................................................
P2,050,000
P1,868,000
Less average preference shares................................................................................
200,000
200,000
Average ordinary equity (b).....................................................................................
P1,850,000
P1,668,000
*1/2(P2,150,000 + P1,950,000); 1/2(P1,950,000 + P1,786,000).
Return on ordinary equity (a) (b)
16.6%
13.4%
This Year
P 232,000
50,000
Last Year
P 120,000
50,000
P4.64
P2.40
P1.44
P36.00
4.0%
P0.72
P20.00
3.6%
P1.44
P4.64
31.0%
P0.72
P2.40
30.0%
P36.00
P4.64
7.8
P20.00
P2.40
8.3
Notice from the data given in the problem that the average P/E ratio for
companies in Helixs industry is 10. Since Helix Company presently has
a P/E ratio of only 7.8, investors appear to regard it less well than they do
other companies in the industry. That is, investors are willing to pay only
7.8 times current earnings for a share of Helix Companys stock, as
compared to 10 times current earnings for a share of stock for the average
company in the industry.
e. Equity
Less preference shares
Ordinary equity (a)
Number of ordinary shares (b)
Book value per share (a) (b)
P3,200,000
600,000
P2,600,000
P3,040,000
600,000
P2,440,000
50,000
P52.00
50,000
P48.80
Note that the book value of Helix Companys stock is greater than the
market value for both years. This does not necessarily indicate that the
stock is selling at a bargain price. Market value is an indication of
investors perceptions of future earnings and/or dividends, whereas book
value is a result of already completed transactions and is geared to the
past.
f.
P1,050,000
P5,250,000
20.0%
P860,000
P4,160,000
20.7%
This Year
P2,600,000
Last Year
P1,980,000
Requirement 3
a. Current assets
5-25
Current liabilities
Working capital
1,300,000
P1,300,000
920,000
P1,060,000
P2,600,000
P1,300,000
2.0 to 1
P1,980,000
P920,000
2.15 to 1
P1,220,000
P1,300,000
0.94 to 1
P1,120,000
P920,000
1.22 to 1
P5,250,000
P750,000
7.0 times
P4,160,000
P560,000
7.4 times
52 days
P4,200,000
P1,050,000
4.0 times
49 days
P3,300,000
P720,000
4.6 times
91 days
79 days
f.
P2,500,000
P3,200,000
0.78 to 1
P1,920,000
P3,040,000
0.63 to 1
P520,000
P120,000
4.3 times
P340,000
P100,000
3.4 times
As stated by Meri Ramos, both net income and sales are up from last year.
The return on total assets has improved from 5.1% last year to 6.8% this year,
and the return on ordinary equity is up to 9.2% from 4.9% the year before.
But this appears to be the only bright spot in the companys operating picture.
Virtually all other ratios are below the industry average, and, more important,
they are trending downward. The deterioration in the gross margin percentage,
while not large, is worrisome. Sales and inventories have increased
substantially, which should ordinarily result in an improvement in the gross
margin percentage as fixed costs are spread over more units. However, the
gross margin percentage has declined.
5-26
P140,800
84,480
P 56,320
46,320
P 10,000
Bulacan Company
Balance Sheet
December 31, 2005
As s e t s
Current Assets:
Cash
Accounts Receivable (5)
Merchandise Inventory (3)
Total Current Assets (2)
Fixed Assets (8)
Total Assets
P 27,720
28,160
21,120
P 77,000
55,000
P132,000
P 44,000
5-27
P40,000
48,000
88,000
P132,000
Supporting Computations:
(1) Earnings Per Share
Net Income
Ordinary Shares Outstanding
P0.50
X
20,000
X (Net Income)
P10,000
1.75
1
0.75
=
P33,000 0.75
P44,000
Current Assets
Current Liabilities
X
44,000
1.27
X (Current Assets)
P77,000
Quick Assets
Current Liabilities
1.27
X
44,000
X (Current Assets)
P55,880
Quick Ratio
5-28
Current Assets
Quick Assets
Inventory
P77,000
55,800
P21,120
X (Cost of Sales)
Cost of Sales
Ave. Inventory
X
P21,120
P84,480
Quick Assets
Current Liabilities
365
5
Net Sales
Average Receivables
P140,800
X
X (Receivables)
P28,160
Another Method:
P140,800
365
73 days
Fixed
Assets
P40,000
Current Liabilities +
Equity
5-29
P77,000 + 0.625X
P44,000 + X
0.375X
P33,000
X
(8) Fixed Assets to Equity
P88,000 Equity
Fixed Assets
Equity
X
P140,800
X (Fixed Assets)
0.625
0.625
P55,000
Current assets
Current liabilities
Current rate
P290,000
P164,000
Acid-test ratio =
= 1.8 (rounded)
P70,000 + P0 + P50,000
Acid-test ratio =
= 0.70 (rounded)
P164,000
Net operating income
P20,000
=
P80,000 x 0.10 x (6/12) = 5.0
Interest on the loan
The company would fail to qualify for the loan because both its current ratio
and its acid-test ratio are too low.
Requirement 2
By reclassifying the P45 thousand net book value of the old machine as
inventory, the current ratio would improve, but there would be no effect on the
acid-test ratio. This happens because inventory is considered to be a current
5-30
asset but is not included in the numerator when computing the acid-test ratio.
Current ratio
Current rate
Acid-test ratio =
Current assets
Current liabilities
P290,000 + P45,000
= 2.0 (rounded)
P164,000
P70,000 + P0 + P50,000
= 0.70 (rounded)
P164,000
Even if this tactic had succeeded in qualifying the company for the loan, we
strongly advise against it. Inventories are assets the company has acquired for
the sole purpose of selling them to outsiders in the normal course of business.
Used production equipment is not considered to be inventoryeven if there is
a clear intention to sell it in the near future. Since the loan officer would not
expect used equipment to be included in inventories, doing so would be
intentionally misleading.
Acid-test ratio =
Nevertheless, the old equipment is an asset that could be turned into cash. If
this were done, the company would immediately qualify for the loan since the
P45 thousand in cash would be included in the numerator in both the current
ratio and in the acid-test ratio.
Current ratio
Current rate
Current assets
Current liabilities
P290,000 + P45,000
= 2.0 (rounded)
P164,000
Acid-test ratio =
Acid-test ratio =
= 1.00 (rounded)
However, other options may be available. After all, the old machine is being
used to relieve bottlenecks in the plastic injection molding process and it
would be desirable to keep this standby capacity. We would advise Rome to
fully and honestly explain the situation to the loan officer. The loan officer
might insist that the machine be sold before any loan is approved, but he might
instead grant a waiver of the current ratio and acid-test ratio requirements on
the basis that they could be satisfied by selling the old machine. Or he may
approve the loan on the condition that the equipment is pledged as collateral.
5-31
In that case, Rome would only have to sell the machine if he would otherwise
be unable to pay back the loan.
Case 6 (Financial Ratios for Ordinary Shareholders)
[pesos in thousands]
Requirement (1)
Calculation of the gross margin percentage:
Gross margin percentage
Gross margin
Sales
P23,000
P66,000
= 34.8%
Requirement (2)
Calculation of the earnings per share:
Earnings per share
=
=
Requirement (3)
Calculation of the price-earnings ratio:
Market price per share
Price-earnings ratio
=
Earnings per share
P26
P3.20
= 8.1
Requirement (4)
Calculation of the dividend payout ratio:
Dividend payout ratio
P0.75
P3.20
=
Requirement (5)
Calculation of the dividend yield ratio:
5-32
= 23.4%
=
=
= 2.9%
Requirement (6)
Calculation of the return on total assets:
Return on total assets
= 3.7%
Requirement (7)
Calculation of the return on ordinary shareholders equity:
Beginning balance, shareholders equity (a)
Ending balance, shareholders equity (b)
Average shareholders equity [(a) + (b)]/2
Average preference shares
Average ordinary shareholders equity
Return on ordinary
shareholders equity
=
=
P39,610
41,080
40,345
1,000
P39,345
P1,980 P60
P39,345
= 4.9%
Requirement (8)
Calculation of the book value per share:
Book value
per share
P41,080 P1,000
= for Short-Term Creditors)= P66.80 per share
Case 7 (Financial Ratios
600 shares
Requirement (1)
Calculation of working capital:
5-33
Working capital
Requirement (2)
Current assets
Current liabilities
P22,680
= 1.17
P19,400
Requirement (3)
Calculation of the acid-test ratio:
Acid-test ratio =
Acid-test ratio =
= 0.52
Requirement (4)
Calculation of accounts receivable turnover:
Accounts receivable
turnover
Acid-test ratio =
Sales on account
Average accounts receivable balance
P66,000
(P6,500 + P9,000) / 2
= 8.5
Requirement (5)
Calculation of the average collection period:
Average collection
period
Acid-test ratio =
365 days
Accounts receivable turnover
365 days
= 42.9 days
8.5 5-34
Requirement (6)
Calculation of inventory turnover:
Inventory
turnover
P43,000
(P10,600 + P12,000) / 2
Acid-test ratio =
= 3.8
Requirement (7)
Calculation of the average sale period:
Average sale
period
365 days
Inventory turnover
365 days
3.8
Acid-test ratio =
= 96.1 days
Acid-test ratio =
Total liabilities
Shareholders equity
P27,400
P41,080
5-35
= 0.67
A
C
D
B
A
D
C
D
A
B
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
C
A
C
B
D
B
A
C
A
C
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
B
D
A
C
A
C
D
A
D
A
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
5-36
C
D
C
A
A
C
A
A
C
C
41. C