ANALYSIS OF FINANCIAL STATEMENTS

LIQUIDITY RATIOS (SHORT TERM SOLVENCY)

Liquidity Ratio measures the ability of the entity to pays its short term obligations using
current assets
1. Current Ratio
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 2,175,000.00
= = 𝟒. 𝟎𝟐: 𝟏
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 541,500.00
The current ratio of the company is 4.02:1 it shows that the company can paid its
short term obligation

2. Working Capital

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 2,175,000.00-541,500.00 = 1,633,500.00

The working capital of the company is 1,633,500.00 it means has substantial
working capital, then it should have the potential to invest and grow.

Solvency ratios measure the ability of a company to pay its long-term debt and the interest
on that debt

1. Debt-to-Assets Ratio

𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 1,041,500.00

= = .22:1
𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 4,615,000.00

The Debt-to-Assets Ratio of the company is .22:1 it means the company has
enough funds to meet its current debt obligation.

2. Equity -to- Assets Ratio

𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 3,573,500.00

= =. 𝟕𝟕: 𝟏
𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 4,615,000.00

The of Equity -to- Assets Ratio the company .77:1 it means that company can be
paid the obligations to creditors.
3. Debt-to-Equity Ratio

𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 1,041,500.00

= = .29:1
𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 3,573,500.00

The Debt-to-Equity Ratio of the company is .29:1 it reflects the ability of

shareholder equity to cover all outstanding debts in the event of a business downturn.

4. Cash-flow-to- Total Debt Ratio

𝑁𝑒𝑡 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑖𝑒𝑠 (68,000)

= = −𝟎𝟔 ∶ 𝟏
𝑡𝑜𝑡𝑎𝑙 𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 1,041,500.00

The Cash-flow-to- Total Debt Ratio of the company is -06∶1 it means that the
business has a difficulty to pay off all of its debt FROM cash flow generated from operations

5. Times-interest-Earned

𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡+𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡+𝑡𝑎𝑥𝑒𝑠 368,200+141,300+108,000

= = 5.71.1
𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐ℎ𝑎𝑟𝑔𝑒 108,000

The Times-interest-Earned of the company is 5.71.1it means that the company

can generate cash and can make principal and interest payment to avoid bankruptcy

PROFITABILITY RATIOS (Financial Performance Ratio)

Profitability Ratios measure the ability of the entity to generate profit in relation to sales,
assets, equities, or ordinary shares outstanding.

1. Gross Profit Ratio or Gross Margin Ratio

𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 1,424,000.00
= = 0.21 : 1 or 20.57 %
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 6,922,000.00

The Gross Margin ratio has a percentage rate of 20.57%. It shows that the company has
an average effectiveness of pricing, marketing, purchasing, and production decisions.
The basis is that higher prices may decrease the amount of the gross margin by
depressing sales.
2. Net Profit Ratio or Return on Sales
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 368,200.00
= = 𝟎. 𝟎𝟓 ∶ 𝟏 𝒐𝒓 𝟓. 𝟑𝟐 %
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 6,922,000.00

The Net Profit ratio has a percentage rate of 5.32%. It shows that the company has an
average after-tax profit per 1 peso of sales. The basis is that the company’s net profit is
5.32% of the net sales of the period, that it’s an average percentage for accumulating
net profit in relation to the amount of net sales.

3. Return on Investment (ROI) or Return on Assets (ROA)

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡+𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 (𝑛𝑒𝑡 𝑜𝑓 𝑡𝑎𝑥) 368,200.00+(108,000.00 𝑥 (1− 0.30))
𝑥 100 = 𝑥 100 = 𝟏𝟎. 𝟏𝟓 %
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 (4,126,000.00+4,615,000.00)/2

The Return on Assets of the company has a percentage rate of 10.15%. It shows that the
company has a 10.15% after tax profit per 1 peso of assets invested in the business by
both creditors and owners

4. Return on Ordinary Equity

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝑥 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦
368,200.00 − 0
= 𝟏𝟓. 𝟑𝟒 %
(2,500,000.00 + 2,300,000.00)/2

The Return on Ordinary Equity of the company has a percentage rate of 15.34%. It shows
that the company has 15.34% after-tax profit net of dividends per 1 peso of common
shareholders’ investment in the firm.

5. Return on Total Equity

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡−𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑜𝑛 𝑅𝑒𝑑𝑒𝑒𝑚𝑎𝑏𝑙𝑒 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑆ℎ𝑎𝑟𝑒𝑠
x 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
368,200.00 − 0
(3,573,500.00+2,955,300.00)
𝑥 100 = 𝟏𝟏. 𝟐𝟖 %
2

The Return on Total Equity of the company has a percentage rate of 11.28%. It shows
that the company has a 11.28% of after-tax profit net of dividends on redeemable
preferred shares per 1 peso of total shareholders’ equity in the firm.
TURN-OVER RATIOS (Operating Ratios)
Operating ratios measure the ability of the entity in performing its operations (business
activities) in efficient manner – a factor ultimately related to profits.

1. Finished Goods or Inventory Turnover

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠 6,950,000.00
= = 𝟏𝟕. 𝟖𝟐 𝒕𝒊𝒎𝒆𝒔
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐹𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝐺𝑜𝑜𝑑𝑠 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 390,000.00

The Inventory Turnover of the company is 17.82 times the inventory has been sold and
replaced during the year (2018). The Inventory Turnover measures the length of time
required to sell manufactured goods or purchased goods to customers of the company.

2. Average Sale Period or Average Age of Inventory

365 𝑑𝑎𝑦𝑠 365 𝑑𝑎𝑦𝑠
= = 𝟐𝟎 𝒅𝒂𝒚𝒔
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 17.82 𝑡𝑖𝑚𝑒𝑠

3. Accounts Receivable Turnover

𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 𝑜𝑟 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 6,922,000.00
= = 𝟐𝟎. 𝟒𝟖 𝒕𝒊𝒎𝒆𝒔
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 338,050.00

4. Ave. Collection Period or Ave. Age of Receivables

365 𝑑𝑎𝑦𝑠 365 𝑑𝑎𝑦𝑠
= = 𝟏𝟖 𝒅𝒂𝒚𝒔
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 20.48 𝑡𝑖𝑚𝑒𝑠

5. Operating Cycle or Conversion Period

𝐴𝑣𝑒. 𝐴𝑔𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 + 𝐴𝑣𝑒. 𝐴𝑔𝑒 𝑜𝑓 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
20 𝑑𝑎𝑦𝑠 + 18 𝑑𝑎𝑦𝑠 = 𝟑𝟖 𝒅𝒂𝒚𝒔

6. Total Assets Turnover

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 6,922,000.00
= = 𝟏. 𝟓𝟖 𝒕𝒊𝒎𝒆𝒔
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 4,370,500.00

7. Accounts Payable Turnover

𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 𝑜𝑟 𝑁𝑒𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 3,907,000.00
= = 𝟏𝟐. 𝟑𝟗 𝒕𝒊𝒎𝒆𝒔
𝐴𝑣𝑒. 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 315,350.00
 8. Ave. Age of Accounts Payable or Ave. Payment Period
365 𝑑𝑎𝑦𝑠 365 𝑑𝑎𝑦𝑠
= = 𝟐𝟗 𝒅𝒂𝒚𝒔
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 12.39 𝑡𝑖𝑚𝑒𝑠

9. Plowback Ratio
𝐴𝑚𝑜𝑢𝑛𝑡 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 100,000.00
= = 𝟎. 𝟐𝟕 ∶ 𝟏
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 368,200
*Assume that the cash available for investment is P 100,000.00

GROWTH RATIOS (Shareholders’ Ratios)

Shareholders’ Ratio provides investors with measures of the entity’s performance and returns
on its share capital. The shareholder’s ratios are indicators of firm’s potential and attractiveness
as an investment option. Investors directly earn returns from stock ownership in two ways: a.
from dividends and b. from increases in the market price of their stock. In addition, investors
indirectly earn from stock ownership through appreciation in the book value of their shares.

1. Basic Earnings per Share

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
368,200.00−0
= P 3.07 per share
(115,000 𝑠ℎ𝑎𝑟𝑒𝑠+125,000 𝑠ℎ𝑎𝑟𝑒𝑠)/2

2017, (2,300,000 share capital/20 par value) = 115,000 shares; 2018, (2,500,000 share
capital/20 par value) = 125,000 shares

2. Fully Diluted Earnings per Share

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 +
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒𝑠 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑜𝑓 𝐶𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒 𝑆ℎ𝑎𝑟𝑒𝑠
368,200.00
= 𝑷 𝟑. 𝟎𝟕 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆
((115,000 𝑠ℎ𝑎𝑟𝑒𝑠 + 125,000 𝑠ℎ𝑎𝑟𝑒𝑠)/2)) + 0

3. Earnings Yield
 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝑃 3.07 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
= = 𝟏𝟐. 𝟐𝟖 %
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝑃 25.00 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

4. Price Earnings Ratio

𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝑃 25.00 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑥100 = 𝑥 100 = 𝟖𝟏𝟒. 𝟑𝟑 %
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝑃 3.07 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

5. Book Value per Share – Ordinary

𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑆ℎ𝑎𝑟𝑒𝑠 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝐴𝑣𝑒. 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒𝑠
3,573,500.00 − 0
= 𝑷 𝟐𝟗. 𝟕𝟖 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆
(115,000 𝑠ℎ𝑎𝑟𝑒𝑠 + 125,000 𝑠ℎ𝑎𝑟𝑒𝑠)/2