Group # 5

Raeesa Gul Khan, Muhammad Arslan

Azeem Farrukh, Muhammad Idrees
Problem # 12-32
Computation Of Accounting Ratios
(All The Amounts Are Dollars $ In Million, Except Per Share Data

1. Current Ratio:-

Definition:-

It is a ratio that is used to compute the ability of the company to pay of its current liabilities with its cur

Solution:-

Current Assets
Current Ratio =
Current Liabilities

15,220
Current Ratio =
12,358

= 1.23

Analysis:-

If the current ratio is high then, the company will be more capable to pay-off its current liabiliti
A cuurrent ratio of the company shows that it would not ba pay-off its liabilities because the standard r

2. Quick Ratio:-

Definition:-

It is a ratio which determines that a company has enough short-term assets to pay-off its curren
liabilities without selling an inventory.

Solution:-
 Quick Assets Quick Assets = Current Assets - Inventory
Quick Ratio =
Current Liabilities = 15,220 - 3,640
= 7,940
11,580
Quick Ratio =
12,358

= 0.94

Analysis:-

If Business quick ratio is 1:1, it is considered to be having good current financial position.

The Quick Ratio of company is lower than the Current Ratio and standard quick ratio, means CurrentAs
company are dependent on Inventory.

3. Average Collection Period

Definition:-

The approximate time period which a company takes to receive the payment s from their customers, clien

Solution:-

365
Average Collection Period =
Accounts Receivable Turnover

Credit Sales
Accounts Receivable Turnover =
Average Accounts Receivable
Average Accounts Rece
43377
Accounts Receivable Turnover =
(3090 + 3038) /2

= 14.15

365
Average Collection Period =
14.15

= 26 Days

Analysis:-

Higher Turnover signifies speedy & effective collection, on the other hand lower turnover signifies in
collection from the customers
 Higher Turnover signifies speedy & effective collection, on the other hand lower turnover signifies in
collection from the customers

4. Total Debts To Total Assets:-

Definition:-

A ratio which is used to compute a financial risk of a company by determining how much
of the assets have been financed by debt.

Solution:-

Total Debt
Total Debt To Total Assets = X 100
Total Assets

27,520
Total Debt To Total Assets = X 100
43,706

= 0.63

Analysis:-

A debt ratio of greater than 1 indicates that a company has more debt than assets.
A debt ratio of less than 1 indicates that a company has more assets than debt.
This ratio shows that the company have more assets than the liabilities or liabilities are 63% of the tot

5. Total Debt To Equity:-

Definition:-

This ratio indicates what proportion of equity and debt the company is using to finance its asse

Solution:-

Total Liabilities
Total Debt To Equity =
Stockholders Equity

27,520
Total Debt To Equity =
16,186

= 1.7
 Analysis:-

When debt/equity ratio is high, it means that a company is aggressive in financing through deb
More the borrowing and less the stockholder's equity,the risk is to lend money to the firm
This ratio shows that the company have more borrowing / debt than the equity of the company

6. Interest Coverage Ratio:-

Definition:-

It is a ratio used to determine how easily a company can pay interest on its outstanding debts.

Solution:-

Net Income Before Interest & Taxes

Interest Coverage Ratio =
Interest Expense

8,091
Interest Coverage Ratio =
561

= 14.42

Analysis:-

Lower the ratio, more the company is burdened by debt expense

An interest coverage ratio below 1 indicates that the company is not generating enough
revenues to satisfy the interest expenses of the company
The ratio of the company shows that the company is not much burdened by the debt expense

7. Return On Common Stockholder's Equity:-

Definition:-

This ratio shows the return to common stockholders after the payment of preferred shares

Solution:-

Net Income - Preferred Dividends

Return On Common Stockholder's Equity =
Average Common Stockholder's Equity
 5,186 - 125
Return On Common Stockholder's Equity =
(14,606 + 12,072)/2

= 37.94%

Analysis:-

For high growth, companies should expect a higher Return on Equity

Averaging Return on Equity over the past 5-10 years can give a better idea of the historical grow
A return on equity of over 10% indicates enough to pay common share dividends and retain fun
for business growth

8.Gross Profit Ratio:-

Definition:-

This ratio shows the margin of profit that a business is able to earn on its
Trading and Manufacturing activities

Solution:-

Gross Profit
Gross Profit Rate = X 100
Net Sales

21,236
Gross Profit Rate = X 100
43,377

= 48.96%

Analysis:-

The gross margin is not an exact estimate of the company's pricing strategy but, it does give a go
indication of financial health
Without an adequate gross margin, a company will be unable to pay its operating and other expen
In general, a company's gross profit margin should be stable.
This gross profit ratio of the company shows the normal position of finance / financial positio

9. Return On Sales:-
 Definition:-

This type of ratio is widely used to evaluate/calculate a company's operational efficiency

Solution:-

Net Income
Return On Sales = X 100
Total Sales

5,186
Return On Sales = X 100
43,377

= 11.96%

Analysis:-

Return on Sale is a useful measure of a company's operational efficiency as well as its profitabil
An increasing ROS indicates the company is growing more efficient, while a decreasing Return on
could signal looming financial troubles.
It reflects how well company manage its cost, and how it responds to difficulties like a goin down of sale
costs and a fall in prices

10. Assets Turnover Ratio:-

Definition:-

Asset turnover ratio shows an investor the total sales for each $1 of assets

Solution:-

Sales
Assets Turnover =
Avg. Total Assets

43,377
Assets Turnover =
(43,706 + 40,776)/2

= 1.03

Analysis:-

Higher the number the better it is companies with low profit margins tend to have high asset turnover,whi
high profit margins have low asset turnover.
 Higher the number the better it is companies with low profit margins tend to have high asset turnover,whi
high profit margins have low asset turnover.

11. Return On Assets:-

Definition:-

Return on assets shows to the investor that how much profit a company generated for each $1 of asset

Solution:-

Earning Before Income & Tax

Return On Assets = X 100
Average Total Assets

8,091
Return On Assets = X 100
(43,706 + 40,776)/2

= 19.15%

Analysis:-

A high Return On Assets ratio indicates that the business is earning more money and
investing less on assets.
In the industry, as a general rule, Return On Assets ratio below 5% indicates that the company
has a very heavy assets
Return On Assets ratio above 20% indicates that the company is asset-light.

12. Earning Per Share:-

Definition:-

The portion of a company's profit allocated to each outstanding share of common stock. Earnings
share serves as an indicator of a company's profitability.

Solution:-

Net Income - Preferred Dividends

Earning Per Share =
Average Number of Common Shares Outstanding

5186 - 125
Earning Per Share =
1296
 = 3.91 Per Share

Analysis:-

Earnings per share is generally considered to be the single most important variable in determini
a price of per share which shows in the balance sheet in foot notes or in shareholders equity sect
Earnings per share allows us to compare different companies’ power to make money.
The higher the earnings per share with all else equal, the higher each share should be worth.

13. Price Earning Ratio:-

Definition:-

Current share price ratio is a valuation ratio of a company compared to company's pre-share earn

Solution:-

Market Price of Common Share

Price Earning =
Earning Per Share

88.3
Price Earning =
3.9

= 22.641

Analysis:-

In general, a high Price Earning suggests the investors are expecting higher earnings

future
It's usually morecompared to companies
useful to compare withEarning
the Price a lower ratios
Price Earning 
of one company to
companies
in the same
This price earning ratio of the company industry.
shows that the company earns much more

14. Dividend Yeild Ratio:-

Definition:-

The Dividend Yield Ratio shows the amount of dividends that a company pays t

investors in comparison to the market price of its stock.
 Solution:-

Dividend Per Common Share

Dividend Yield Ratio = X 100
Market Price of Common share

1.64
Dividend Yield Ratio = X 100
88.3

= 1.85%

Analysis:-

Shows that stock is underpriced (less than its real value).

Shows that stock is overpriced (more than its real value).
Shows the company has been hit hard in times of economic depression and financia
Indicates future dividend payments might actually be higher than the current dividend
Indicates future dividend payments may NOT be as high as the current one
Shows the company is relatively financially stable.

15. Dividend Payout Ratio:-

Definition:-

The percentage of earnings paid to shareholders in dividends is called "Dividend Pay

Solution:-

Dividend Per Common Share

Dividend Payout Share = X 100
Earning Per share

1.64
Dividend Payout Share = X 100
3.9

= 42.10%

Analysis:-

The Payout Ratio provides an idea of how well earnings support the dividend pay
More mature companies tend to have a higher Payout Ratio.
The payout ratio of the company shows that the payment of the loans ratio is normal
16. Market To Book Value Ratio:-

Definition:-

Market Value

 The current quoted price at which investors buy or sell a share of common stoc
bond at a given time. Also known as "Market Price"

Book Value

The initial outlay for an investment. This number may be net or gross of expenses
trading costs, sales taxes, service charges and so on. 

Solution:-

Market Price of Common Share

Market To Book Value =
Book Value Per Common Share

Total StockHolders Equity - Book Value of Preferr

Book Value Per Common Share =
Number of Common Shares Outstan

16186 - 1580 = 11.26

Book Value Per Common Share =
1297

88.3
Market To Book Value =
11.26

= 7.842

Analysis:-

In the context of securities, Market Value is often different from book value because the ma
into account future growth potential.
Most investors who use fundamental analysis to pick stocks look at a company's market valu
determine whether or not the market value is adequate
This ratio of the company shows that the market value of per share is greater than the book value pe
Final Project And Term Paper Subm
Fall Semester 201
Arslan
drees

atios
ept Per Share Data)

current liabilities with its current assets

to pay-off its current liabilities

bilities because the standard ratio is 2:1

rm assets to pay-off its current

y.
Current Assets - Inventory
15,220 - 3,640
7,940

d current financial position.

quick ratio, means CurrentAssets of the

y.

s from their customers, client or debtors

Average Accounts Receivable = Opening A/R + Closing A/R / 2

nd lower turnover signifies ineffective

 by determining how much
bt.

more debt than assets.

more assets than debt.
r liabilities are 63% of the total assets

ny is using to finance its assets.

sive in financing through debt.
s to lend money to the firm
han the equity of the company

erest on its outstanding debts.

y debt expense
y is not generating enough
e company
urdened by the debt expense

payment of preferred shares

- Preferred Dividends
X 100
mon Stockholder's Equity
 X 100

Return on Equity
tter idea of the historical growth
share dividends and retain funds

s able to earn on its

s

strategy but, it does give a good

its operating and other expenses

uld be stable.
of finance / financial position
any's operational efficiency

ciency as well as its profitability

while a decreasing Return on sale
es.
lties like a goin down of sales, increasing

or each $1 of assets

have high asset turnover,while those with

over.
y generated for each $1 of assets

earning more money and

% indicates that the company

mpany is asset-light.

e of common stock. Earnings per

ofitability.

s Outstanding
mportant variable in determining
or in shareholders equity section
s’ power to make money.
each share should be worth.

d to company's pre-share earning

pecting higher earnings growth in

ice
ios Earning 
of one company to other

mpany earns much more

s that a company pays to its

ce of its stock.
 its real value).
its real value).
depression and financial hardship.
han the current dividend payments.
high as the current one.
ially stable.

is called "Dividend Payout Ratio"

upport the dividend payments.

her Payout Ratio.
the loans ratio is normal
a share of common stock or a
arket Price"

et or gross of expenses such as

es and so on. 

- Book Value of Preferred Stock

ommon Shares Outstanding

ook value because the market takes

ial.
a company's market value and then
e is adequate
reater than the book value per share
Term Paper Submitted By Group # 5
all Semester 2010