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Financial Ratio Analysis Data from Income statement: 2008
Cost of Goods Sold
Pre-tax Operating Income
Net Income after Taxes
Data from Balance Sheet: 2008
Total Current Assets
Current Portion of LT Debt
Total Current Liabilities
Data Shown in Thousands of Rupees 2008
Debt to equity
Assets to equity
Times interest earned
Net wkg cap'l (,000 OMITTED)
Working capital to assets
Days sales in inventory
Working capital turnover
Return on sales
Return on total assets
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
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 shortterm 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:
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 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.