Balance Sheet: Current Assets

Balance Sheet
Current Assets 1988 1987

Cash 415 934
Marketable Securities 1000 1000
Accounts Receivables 3062 1833
Inventory 1980 1700
Prepaid Expenses 123 100
Total current assets 6580 5567
Balance Sheet
Non Current Assets 1988 1987
Gross plant & equipment 11500 10000
Accumulated depreciation 2550 1350
Other assets and intangibles 50 50
Total Assets 15580 13667
Balance Sheet
Current Liabilities 1988 1987
Accounts payable 1594 1011
Notes payable 2210 1693
Accrued salaries and wages 63 55
Accrued taxes 174 183
Current portion of long term
debt
220 220
Total current liabilities 4261 3162

Balance Sheet
Non Current Liabilities 1988 1987
Bank term loan 500 575
Mortgage 1355 1500
Deferred income tax 1783 1012
Total noncurrent liabilities 3638 3087
Balance Sheet
Share holders equity 1988 1987
Common stock(par value
$1.00 )
4000 4000
Paid in surplus 1513 1513
Retained earnings 2168 1905
Total shareholders equity 7681 7418
Total liabilities and
shareholders equity
15580 13667
Asset Utilization Ratios
Asset utilization ratios, also known as
activity ratios, measure management ability
to properly utilize the resources allocated to
the firms fixed assets as well as its current
assets.
These ratios are constructed by comparing a
balance sheet asset item to an activity
variable, such as net sales or cost of goods
sold.
Total Asset Turnover
The ratio of net sales divided by tangible
assets is also known as asset turnover. This
ratio compares the level of net sales for a
particular year to the level of tangible total
assets allocated to generate those sales .
This ratio calculates the dollar amount of
sales generated by one dollar of Assets
79 . 0
000 , 530 , 15 $
000 , 250 , 12 $
assets total tangible
sales Net

1988 for over Asset turn Total
Total asset turnover for 1987=0.81 Industry average = 2.1

A dollar invested in the assets of Daubes produced $0.79 in net sales
In 1988. The second interpretation is that the assets of Daubes
Turned over 0.79 times during 1988
Accounts Receivable Turnover
The accounts receivable turnover is
calculated much like the asset turnover ratio
except that receivables are substituted for
tangible assets
0 . 4
000 , 062 , 3 $
000 , 250 , 12 $
s receivable Accounts
sales Net

1988 for turnover receivable Accounts
Inventory Turnover
The inventory turnover ratio measures the number
of times that the average dollar invested in
inventory turns over in a year.
Alarge turnover ratio may also indicate, however
that the inventory balance is too small relative to
sales and that the possibility of losing sales does
exist.
A low turnover ratio on the other hand, may be a
sign of too large an investment in inventory
45 . 4
000 , 980 , 1 $
000 , 820 , 8 $
Inventory
Sold Goods of Cost

1988 for turnover Inventory
Fixed Asset Turnover

We can calculate a fixed asset turnover ratio
to measure utilization of the firms
investment in fixed assets by dividing net
sales by net fixed assets
37 . 1
000 , 950 , 8 $
000 , 250 , 12 $
assets fixed Net
Sales Net

1988 for over Asset turn Fixed
Liquidity Ratios
Liquidity analysis is concerned with a firms ability
to repay or cover in short term obligations.
The dollar amount of short term financial
obligation can be found in the current liabilities
section on the firms balance sheet.
The firms ability to cover its obligations is
determined by the dollar amount of cash and
marketable securities the firm has as well as the
dollar amount of funds tied up in its receivables
and inventory accounts.

1. Current Ratio : It is the relationship between the current
assets and current liabilities of a concern.
Current Ratio =Current Assets/Current Liabilities
If the Current Assets and Current Liabilities of a concern are
Rs.4,00,000 and Rs.2,00,000 respectively, then the Current
Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1
The ideal Current Ratio preferred by Banks is 1.33 : 1

2. Net Working Capital : This is worked out as surplus of
Long Term Sources over Long Tern Uses, alternatively it is
the difference of Current Assets and Current Liabilities.
NWC = Current Assets Current Liabilities
Current Assets : Raw Material, Stores, Spares, Work-in Progress. Finished
Goods, Debtors, Bills Receivables, Cash.

Current Liabilities : Sundry Creditors, Installments of Term Loan, DPG etc.
payable within one year and other liabilities payable within one year.

This ratio must be at least 1.33 : 1 to ensure minimum margin of 25% of current
assets as margin from long term sources.

Current Ratio measures short term liquidity of the concern and its ability to
meet its short term obligations within a time span of a year.
It shows the liquidity position of the enterprise and its ability to meet current
obligations in time.
Higher ratio may be good from the point of view of creditors. In the long run
very high current ratio may affect profitability ( e.g. high inventory carrying cost)
Shows the liquidity at a particular point of time. The position can change
immediately after that date. So trend of the current ratio over the years to be
analyzed.
Current Ratio is to be studied with the changes of NWC. It is also necessary to
look at this ratio along with the Debt-Equity ratio.
3. ACID TEST or QUICK RATIO : It is the ratio between Quick Current
Assets and Current Liabilities. The should be at least equal to 1.

Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months +
Quickly realizable securities such as Govt. Securities or quickly marketable/quoted
shares and Bank Fixed Deposits

Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

Example :
Cash 50,000
Debtors 1,00,000
Inventories 1,50,000 Current Liabilities 1,00,000
Total Current Assets 3,00,000

Current Ratio = > 3,00,000/1,00,000 = 3 : 1
Quick Ratio = > 1,50,000/1,00,000 = 1.5 : 1

Leverage Ratios
Leverage ratios are designed to assess the balance
of financing obtained through debt and equity
sources.
These ratios can be separated into two distinct
groups: those that measure the relative proportions
of debt and equity financing and those that
measure the firms ability to service its debt
obligation out of current earnings
Times Interest Earned
The times interest earned ratio measures the
number of times that earnings before
interest and taxes cover or exceed the firms
interest expense
30 . 4
000 , 350 $
000 , 350 $ 000 , 154 , 1 $
interest
interest tax before Profit

1988 for earned Interest Times
Times Fixed Financial Charges

Covered
The times fixed financial charges covered is
another coverage ratio but it is more
comprehensive because it measures the
coverage of all financial charges. In the
equation for this ratio T symbolizes the
firms marginal tax rate, which is assumed
to be 40%
10 . 2
) 40 . 0 1 ( 220000
) 40 . 0 1 ( 0 0 000 , 350 $
0 000 , 350 $ 000 , 154 , 1 $
T) - (1 repayments debt
T) - 1 dividends( preferred
payments lease interest
payments lease interest tax before Profit

1988 for covered
charges financial fixed Times
Debt Ratio
The debt ratio measures the proportion of a
companys total financing being supplied by
debt sources, such as account payables,
bank loans, bonds or mortgages
51 . 0
000 , 530 , 15 $
000 , 3638 $ 000 , 261 , 4 $
assets tangible Total
s liabilitie Current Non s liabilitie Current

1988 for Ratio Debt
This ratio indicates that in 1988 half of Daubes total financing is

Derived from long and short term debt sources
Debt Equity Ratio
This comparison relates the total dollar
amount of debt to the firms level of
tangibel shareholder equity. Thus we are
able to directly assess the number of dollars
of debt financing the firm is using per dollar
of shareholder equity
04 . 1
000 , 631 , 7 $
000 , 3638 $ 000 , 261 , 4 $
equity rs shareholde tangible
s liabilitie Current Non s liabilitie Current

1988 for Ratio Equity - Debt
Profitability Ratios
Profit is the difference between revenues earned
and expenses.
We can address the degree of firms profitabilty
from two vantage points. First are the firms costs
or expenses appropriate for the level of revenues
generated? Ratios with this perspective are known
as margin ratios.
Second : Is the firm earning profit relative to the
level of resources invested in the firm? These
ratios are known as return on Investment Ratios
Net Profit Margin
% 65 . 5
000 , 250 , 12 $
000 , 692 $
Sales Net
profit Net

1988 for Margin Profit Net
Return on Assets
Measures the
profitability of the
firm in relation to the
dollars it has invested
in tangible assets
% 46 . 4
000 , 530 , 15 $
000 , 692 $
assets tangible Total
profit Net

1988 for Assets on Return
Return on Assets
% 46 . 4 0446 . 0
79 . 0 0565 . 0
over Asset turn margin x profit Net
ROA
or

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Balance Sheet

Current Assets 1988 1987

Total asset turnover for 1987=0.81 Industry average = 2.1

Fixed Asset Turnover

Times Fixed Financial Charges

This ratio indicates that in 1988 half of Daubes total financing is

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