Problem:
The project assignment for module one involves the actual calculation and interpretation of some of the financial ratios you've been reading about. If you haven't reviewed them yet please see this presentation on financial ratios and this this chapter on financial analysis. There are two companies I want you to look at - Arrow Company and Plume Inc. Perform a basic financial analysis of each company by calculating the following ratios:
1. Rate of return on Equity (ROE) = Net Income / Shareholders' Equity
This ratio can be re-written as a product of the three principal components:
ROE = (Net Income/Sales) x (Sales/Assets) x (Assets/Shareholders' Equity)
The three components are actually: profit margin, asset turnover, and financial leverage, respectively.
2. Return on Assets (ROA) = Net income/Total Assets
3. Gross Margin = Gross profit/Sales
4. Inventory turnover = Cost of goods sold / Ending inventory
5. The Collection Period = Accounts receivable/Credit sales per day, where credit sales per day (or simply "sales per day" are computed by dividing total sales for the year by 365.
6. Fixed-asset turnover = Sales/Total fixed assets
7. Financial leverage ratios:
Debt-to-assets ratio = Total liabilities/Total assets
Debt-to-equity ratio = Total liabilities/Shareholders' equity
8. Liquidity ratios:
Current ratio = Current assets/Current liabilities
Acid test = (Current assets - Inventory)/Current liabilities
When you have finished your calculations, summarize them in a brief response.