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Financial Ratio Analysis

Data from Income statement:


2008 2009 2010

Total Sales 2,085 3,124 4,154

Cost of Goods Sold 1,551 1,927 2,390

Interest Expense 105 105 112

Pre-tax Operating Income 210 326 557

Net Income after Taxes 141 216 366

Dividends Paid

Data from Balance Sheet:


2008 2009 2010

ASSETS

Cash 69 232 133

Accounts Receivable 113 122 130

Inventory 4 4 4

Total Current Assets 1,418 1,872 2,334

Total Assets 2,297 2,579 3,151

LIABILITIES

Current Portion of LT Debt 100 100 100

Total Current Liabilities 802 1,011 1,345

Total Liabilities 1,173 1,216 1,463

Owners' Equity 861 1,133 1,481

Shares Outstanding 500,000 500,000 500,000

Financial Ratio
Data Shown in Thousands of Rupees

2008 2009 2010

Debt to equity 1.36 1.07 0.99

Assets to equity 2.67 2.28 2.13

Debt ratio 0.51 0.47 0.46

Times interest earned 2.00 3.10 4.97

Net wkg cap'l (,000 OMITTED) 0.62 0.86 0.99

Working capital to assets 0.27 0.25 0.28

Current ratio 1.77 1.85 1.74

Quick ratio 0.23 0.35 0.20

Inventory turnover 387.75 481.75 597.50

Days sales in inventory 0.94 0.76 0.61

Asset turnover 0.91 1.21 1.32

Equity turnover 2.42 2.76 2.80

Working capital turnover 3.38 3.63 4.20

Return on sales 0.07 0.07 0.09

Return on total assets 0.06 0.08 0.12

Gross margin 0.26 0.38 0.42

INDICATORS OF SOLVENCY
DEBT TO EQUITY:
This ratio is an indicator of the extent to which a company is using financial
leverage. Generally, a high ratio is acceptable in industries with stable
earnings and less acceptable in industries where earnings are lower and less
predictable. The ratio is calculated an expressed as:

Liabilities
Stockholders' Equity

ASSETS TO EQUITY:

This ratio is an indicator of the extent to which a company is leveraging invested


capital. Again, a high ratio is acceptable in industries with stable earnings and less
acceptable in industries where earnings are lower and less predictable. The ratio is
calculated and expressed as:

Assets
Stockholders' Equity

DEBT RATIO:

This is another leverage measurement. It reflects the extent to which debt is being
use to finance the acquisition of assets. The ratio is calculated and expressed as:

Liabilities
Assets

TIMES INTEREST EARNED:

This important ratio measures the ability of a company to pay the interest on its
long- term debt. A high multiple provides comfort to lenders in terms of the decline
in profitability that can occur before the payment of interest becomes a problem. A
companion ratio, debt service coverage (the subject of another spreadsheet
template),measures the earnings available to meet total debt service, including
principal and interest. Both ratios can be misleading if major debt has been
Net
IncomeBeforeIncomeTaxes&Interes
t
Interest

outstanding less than a fullyear. The times interest earned ratio is calculated and
expressed as:

SEARLE debt to equity Ratio is decreasing which is not a good indicator and
it need to work on it. If a lot of debt is used to finance increased operations
(high debt to equity), the company could potentially generate more
earnings than it would have without this outside financing. If this were to
increase earnings by a greater amount than the debt cost (interest), then the
shareholders benefit as more earnings are being spread among the same
amount of shareholders. However, the cost of this debt financing
may outweigh the return that the company generates on the debt through
investment and business activities and become too much for the company to
handle. This can lead to bankruptcy, which would leave shareholders with
nothing.

SEARLE asset to equity ratio is also decreasing which means it has


decreasing asset/equity ratio which indicates a strong firm that needs no
debt, or an overly conservative company, foolishly foregoing business
opportunities.
SEARLE time interest earned is decreasing which means that it is becoming
less capable the to pay the interest on its debt.

SEARLE has a constant debt ratio of less than 1 indicates that a company has
more assets than debt.

INDICATORS OF LIQUIDITY
NET WORKING CAPITAL:

This component of the template is presented in terms of dollars, not a ratio. It is an


important measure of the dollar effect of completing the business cycle. Working
capital is calculated and expressed as:

Current Assets minus Current Liabilities

WORKING CAPITAL TO ASSETS:

Growth without sufficient working capital can mean disaster. It is important to


monitor the proportion of working capital to total assets as an indicator of liquidity.
The ratio is calculated and expressed as:

Current Assets minus Current


Liabilities
Total Assets

CURRENT RATIO:

This ratio is the one most often used to measure a company's ability to pay its bills
within the next accounting period, usually one year. The "2:1 syndrome" is
pervasive and is a presumption of financial health. This ratio can be too high as well
as too low. The components need to be examined closely; a high inventory may be
the result of low turnover, and high receivables may be the result of slow
collections. The ratio is calculated and expressed as:

Current Assets
Current
Liabilities

QUICK RATIO:
Sometimes referred to as the "acid test" ratio, the quick ratio is a more critical test
of ability to pay debts than the current ratio. Inventories and prepaid items are
excluded from the computation, which is calculated and expressed as:

Cash + Receivables + Temp


Investments
Current Liabilities

SEARLE has increasing net working capital. It has Positive working capital
which means that the company is able to pay off its short-term liabilities with
its current assets (cash, accounts receivable and inventory).

SEARLE has increasing working capital to asset ratio. An increasing Working


Capital to Total Assets ratio is usually a positive sign, showing the company's
liquidity is improving over time.

SEARLE has increasing quick ratio. higher quick ratio indicates the better
position of the company to meet its short-term obligations with its most
liquid assets.

SEARLE has increasing current ratio which tells company's ability has high
ability to pay back its short-term liabilities (debt and payables) with its short-
term assets (cash, inventory, receivables). Ratio above1 suggests that the
company would be able to pay off its obligations if they came due at that
point. While this shows the company is in good financial health.

INDICATORS OF ASSET MANAGEMENT


INVENTORY TURNOVER:

This measurement is an indicator of the effectiveness of the company's inventory


management policy. The higher the turnover during the accounting period, the less
capital that must be devoted to carrying this asset. To be more accurate,
inventory turnover should be measured in relation to the average inventory during
the period. When using the year-end inventory figure, the goals should be set
accordingly, that is, higher if year-end inventories are lower than average and lower
if they are higher. This ratio is calculated and expressed as:

Cost of Goods
Sold
Inventory

DAYS SALES IN INVENTORY:

This ratio is another approach to measuring the effectiveness of inventory control.


In theory it measures the number of days needed to sell the entire inventory if the
mix of merchandise were perfect. Too high a ratio may mean either a poor mix
or excess levels of certain items. Correspondingly, too low a ratio may indicate that
orders cannot be filled promptly, resulting in backorders or lost sales. This ratio is
calculated and expressed as:

Inventory
Cost of Goods Sold divided by
365

ASSET TURNOVER:

This ratio measures the amount of assets required to produce sales. It is measured
and expressed as:

Sales
Total
Assets

EQUITY TURNOVER:

This ratio measures the amount of equity required to produce sales. It is measured
and expressed as:

Sales
Equity

WORKING CAPITAL TURNOVER:

This ratio measures the amount of working capital required to produce sales. It is
measured and expressed as:

Sales
Current Assets - Current
Liabilities
SEARLE has increasing inventory ratio which means its products don’t stay in
the warehouse for longer period of time which is a good sign.

Working capital ratio is constantly increasing which means that the company
is generating a lot of sales compared to the money it uses to fund the sales.

Equity turnover is increasing which means company is using its capital


efficiently.

Asset turnover is increasing slightly but it’s very good which means firm's
efficient at using its assets in generating sales or revenue.

SEARLE has decreasing days sales in inventory which means they are
capable to convert their raw materials to revenues in lesser days.

INDICATORS OF PROFITABILITY
RETURN ON SALES:

The volume of sales has a more meaningful relationship to net income when it is
expressed as a ratio. Extraordinary income or expense is not considered in this
calculation in order to avoid distorting the result. The ratio is calculated and
expressed as:

Net Operating Income After Income


Taxes
Net Sales

RETURN ON TOTAL ASSETS:

One way to measure return on assets is in relation to total assets regardless of the
source of their financing. This ratio is calculated and expressed as:

Net
Operating
Income
After
Income
Taxes
Total
Assets

GROSS MARGIN:

Total Sales - Cost of


Sales = .XX
Sales
An increasing ROS of SEARLE indicates the company is growing more
efficiently.

The greater ratio of company's earnings in proportion to its assets (and the
greater the coefficient from this calculation) i.e. Return on Total Assets -
ROTA, shows that company is using its assets more efficiently.

It has a good increasing gross margin which tells that company will be able to pay
its operating and other expenses and build for the future.