How do you evaluate each of the four groups of financial ratios,including liquidity ratios, asset efficiency (asset management)ratios, capital structure (solvency) ratios, profitability ratios,and market value ratios? Use examples to describe formulas, explaincalculation steps and sources of data (input from which financialstatementâincome statement or balance sheet), and state finalanswers.
How do you evaluate each of the four groups of financial ratios,including liquidity ratios, asset efficiency (asset management)ratios, capital structure (solvency) ratios, profitability ratios,and market value ratios? Use examples to describe formulas, explaincalculation steps and sources of data (input from which financialstatementâincome statement or balance sheet), and state finalanswers.
Related questions
Explain how the ratios help identify the strengths and weaknesses of the facility and the management team.
The students will use Financial Ratios to analyze a potential strategic acquisition.
The student will use the Financial Ratios to evaluate the current management teamâs ablity to make good long term and short term decisions. Should Acme continue to employ the current management team. If Beechtree is acquired, do we keep its management team or do build a new one
| Ratio | Formula | Standard | Beechtree |
| Current Ratio (Liquidity) | Current Assets/Current Liabilities | 1.3 | 1.15 |
| Quick Ratio (liquidity) | (Current Assets-Supplies on hand)/Current Liabilities | 1.2 | .9 |
| Days Cash on Hand (liquidity) | (Cash on Hand +Market Securities)/((Tot Operating Exp-Depreciation Exp)/365) | 50 | 35 |
| Days in Net Receivable (liquidity) | (Accounts Receivable +Notes Receivable + Other Receivable-allowance for uncollectable)/(Tot Operating Revenue/365) | 49 | 65 |
| Debt Service Coverage Ratio (solvency) | Net Operating Income/(Principal +interest + lease payment | >1 | .89 |
| Operating Margin (profitability) | Operating Income/Total Operating Revenue | >.05 | -.005 |
| Return on Total Assets (profitability) | Net Operating Income/Total Assets | 1.1 | .9 |
Net Operating Income for this financial statement=Decrease in unrestricted net assets + Interest Expense + Depreciation
| Financial Ratios | Competitive Comparison | |||||
| Liquidity (Balance Sheet) | Calculations | Starbucks | Yum! | |||
| 2010 | 2009 | 2008 | 2010 | 2010 | ||
| Current Ratio | 1.49 | 1.14 | 1.39 | 1.55 | 0.94 | |
| Quick or Acid Test | 1.22 | 0.96 | 1.18 | 0.98 | 0.69 | |
| Inventory to net working capital | 0.08 | 0.25 | 0.11 | 0.56 | -1.4 | |
| Activity (Balance Sheet) | ||||||
| 2010 | 2009 | 2008 | ||||
| Inventory turnover | 219.06 | 214.17 | 210.96 | 8.21 | 42.96 | |
| Fixed asset turnover | 1.09 | 1.06 | 1.16 | 4.43 | 2.96 | |
| Total Asset Turnover | 0.75 | 0.75 | 0.83 | 1.68 | 1.36 | |
| Leverage (Balance Sheet) | ||||||
| 2010 | 2009 | 2008 | ||||
| Debt to Assets Ratio | 0.36 | 0.35 | 0.36 | 0.08 | 0.35 | |
| Long-term debt to equity ratio | 0.79 | 0.75 | 0.76 | 0.15 | 2.28 | |
| Debt to equity | 1.18 | 1.15 | 1.13 | 0.74 | 3.98 | |
| Times-interest earned ratio | 16.53 | 14.71 | 12.78 | 44.94 | 9.17 | |
| Profitability (Income Statement) | ||||||
| 2010 | 2009 | 2008 | ||||
| Gross profit Margin | 0.40 | 0.39 | 0.37 | 0.58 | 0.16 | |
| Operating profit margin | 0.31 | 0.31 | 0.28 | 0.13 | 0.15 | |
| Net Profit margin | 0.21 | 0.20 | 0.18 | 0.08 | 0.1 | |
| Return on total assets | 0.15 | 0.15 | 0.15 | 0.15 | 0.14 | |
| Return on equity | 0.34 | 0.32 | 0.32 | 0.26 | 0.73 | |
Using the above Mcdonalds financial information, discuss the meaning of the calculated ratios in a general sense and specifically what they mean for the main organization. Also evaluate your calcualted ratios in light of some comparitive standard such as the industry averages or specific competitors (note: I completed the competitive numbers... now just have to analyze).
Discuss: A. Which ratios you would find most useful in making day-to-day management decisions, and why?
B. Which of the ratios you would find most useful in making strategic deicision, and why?
