demonstration problem
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Accounting What the Numbers Mean 9e. Demonstration Problem. Chapter 11 – Problem 9 Ratio Analysis – Comprehensive Problem. Problem Definition. Presented below are summarized data from the balance sheet and income statement of Wiper, Inc.:. Wiper, Inc. Condensed Balance Sheets - PowerPoint PPT PresentationTRANSCRIPT
Demonstration Problem
Chapter 11 – Problem 9
Ratio Analysis – Comprehensive Problem
AccountingWhat the Numbers Mean 9e
Problem Definition• Presented below are summarized data from the balance sheet and income
statement of Wiper, Inc.:
Wiper, Inc.Condensed Balance Sheets
December 31, 2011, 2010, and 2009
2011 2010 2009
Current assets . . . . . . . . . . . . . $ 677 $ 891 $ 736Other assets. . . . . . . . . . . . . . . 2,413 1,920 1,719 $3,090 $2,811 $2,455
Current liabilities . . . . . . . . . . . . $ 562 $ 803 $ 710Other liabilities. . . . . . . . . . . . . . 1,521 982 827Owners’ equity. . . . . . . . . . . . . . . 1,007 1,026 918 $3,090 $2,811 $2,455
Problem Definition
Wiper, Inc.Selected Income Statement Data and Other Data For the Years Ended December 31, 2011 and 2010
(in millions)
Income statement data: 2011 2010
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,050 $2,913
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . 296 310
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 84 65 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 187Other data: Average number of common shares outstanding. . 41.3
46.7 Total dividends paid . . . . . . . . . . . . . . . . . . . . . . . $ 50.0 $ 52.3
a. Calculate return on investment, based on net income and average total assets, for 2011 and 2010. Show both margin and turnover in your calculation.
b. Calculate return on equity for 2011 and 2010.c. Calculate working capital and the current ratio for each
of the past three years. d. Calculate earnings per share for 2011 and 2010.e. If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2011, what was the market price of the stock?f. Calculate the cash dividend per share for 2011 and the
dividend yield based on the market price calculated in part e.
Problem Definition
g. Calculate the dividend payout ratio for 2011.h. Assume that accounts receivable at December 31, 2011,
totaled $309 million. Calculate the number of days’ sales in receivables at that date.
i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2011 and 2010.
j. Calculate the times interest earned factor for 2011 and 2010.
k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.
Problem Definition
a.
Problem Definition
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
2011 ROI =
Problem Definition
ROI = Margin x Turnover
Net income Net income . Sales Average total assets Sales Average total assets
a.
2011 ROI = ($192 / $3,050)
Problem Definition
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)]
Problem Definition
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover
Problem Definition
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI
Problem Definition
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI
2010 ROI =
Problem Definition
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI
2010 ROI = ($187 / $2,913)
Problem Definition
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI
2010 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)]
Problem Definition
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI
2010 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)] = 6.4% margin * 1.106 turnover
Problem Definition
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI
2010 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)] = 6.4% margin * 1.106 turnover = 7.1% ROI
Problem Definition
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
a. Calculate return on investment, based on net income and average total assets, for 2011 and 2010. Show both margin and turnover in your calculation.
b. Calculate return on equity for 2011 and 2010.c. Calculate working capital and the current ratio for each
of the past three years. d. Calculate earnings per share for 2011 and 2010.e. If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2011, what was the market price of the stock?f. Calculate the cash dividend per share for 2011 and the
dividend yield based on the market price calculated in part e.
Problem Definition
b.
Problem Definition
ROE = Net income / Average owners’ equity
b.
2011 ROE =
Problem Definition
ROE = Net income / Average owners’ equity
b.
2011 ROE = $192
Problem Definition
ROE = Net income / Average owners’ equity
b.
2011 ROE = $192 / (($1,007 + $1,026) / 2)
Problem Definition
ROE = Net income / Average owners’ equity
b.
2011 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
Problem Definition
ROE = Net income / Average owners’ equity
b.
2011 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
2010 ROE =
Problem Definition
ROE = Net income / Average owners’ equity
b.
2011 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
2010 ROE = $187
Problem Definition
ROE = Net income / Average owners’ equity
b.
2011 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
2010 ROE = $187 / (($1,026 + $918) / 2)
Problem Definition
ROE = Net income / Average owners’ equity
b.
2011 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
2010 ROE = $187 / (($1,026 + $918) / 2) = 19.2%
Problem Definition
ROE = Net income / Average owners’ equity
a. Calculate return on investment, based on net income and average total assets, for 2011 and 2010. Show both margin and turnover in your calculation.
b. Calculate return on equity for 2011 and 2010.c. Calculate working capital and the current ratio for
each of the past three years. d. Calculate earnings per share for 2011 and 2010.e. If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2011, what was the market price of the stock?f. Calculate the cash dividend per share for 2011 and the
dividend yield based on the market price calculated in part e.
Problem Definition
Problem Solution
c. 2011 2010 2009
Current assets . . . . . . . . . . . . . $677 $891 $736
Problem Solution
c. 2011 2010 2009
Current assets . . . . . . . . . . . . . $677 $891 $736
Current liabilities . . . . . . . . . . (562) (803) (710)
Problem Solution
c. 2011 2010 2009
Current assets . . . . . . . . . . . . . $677 $891 $736
Current liabilities . . . . . . . . . . (562) (803) (710)
Working capital (CA –CL) . . . $115 $ 88 $ 26
Problem Solution
c. 2011 2010 2009
Current assets . . . . . . . . . . . . . $677 $891 $736
Current liabilities . . . . . . . . . . (562) (803) (710)
Working capital (CA –CL) . . . $115 $ 88 $ 26 Current ratio (CA / CL) . . . . . 1.2 1.1 1.0
a. Calculate return on investment, based on net income and average total assets, for 2011 and 2010. Show both margin and turnover in your calculation.
b. Calculate return on equity for 2011 and 2010.c. Calculate working capital and the current ratio for each
of the past three years. d. Calculate earnings per share for 2011 and 2010.e. If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2011, what was the market price of the stock?f. Calculate the cash dividend per share for 2011 and the
dividend yield based on the market price calculated in part e.
Problem Definition
d.
Problem Definition
EPS = Net income / Weighted average number of shares outstanding
d.
2011 EPS =
Problem Definition
EPS = Net income / Weighted average number of shares outstanding
d.
2011 EPS = $192
Problem Definition
EPS = Net income / Weighted average number of shares outstanding
d.
2011 EPS = $192 / 41.3
Problem Definition
EPS = Net income / Weighted average number of shares outstanding
d.
2011 EPS = $192 / 41.3 = $4.65
Problem Definition
EPS = Net income / Weighted average number of shares outstanding
d.
2011 EPS = $192 / 41.3 = $4.65
2010 EPS =
Problem Definition
EPS = Net income / Weighted average number of shares outstanding
d.
2011 EPS = $192 / 41.3 = $4.65
2010 EPS = $187
Problem Definition
EPS = Net income / Weighted average number of shares outstanding
d.
2011 EPS = $192 / 41.3 = $4.65
2010 EPS = $187 / 46.7
Problem Definition
EPS = Net income / Weighted average number of shares outstanding
d.
2011 EPS = $192 / 41.3 = $4.65
2010 EPS = $187 / 46.7 = $4.00
Problem Definition
EPS = Net income / Weighted average number of shares outstanding
a. Calculate return on investment, based on net income and average total assets, for 2011 and 2010. Show both margin and turnover in your calculation.
b. Calculate return on equity for 2011 and 2010.c. Calculate working capital and the current ratio for each
of the past three years. d. Calculate earnings per share for 2011 and 2010.e. If Wiper’s stock had a price/earnings ratio of 13 at
the end of 2011, what was the market price of the stock?
f. Calculate the cash dividend per share for 2011 and the dividend yield based on the market price calculated in part e.
Problem Definition
e.
Problem Definition
Price/Earnings Ratio = Market Price / Earnings Per Share
e.
13 =
Problem Definition
Price/Earnings Ratio = Market Price / Earnings Per Share
e.
13 = $???
Problem Definition
Price/Earnings Ratio = Market Price / Earnings Per Share
e.
13 = $??? / $4.65
Problem Definition
Price/Earnings Ratio = Market Price / Earnings Per Share
e.
13 = $??? / $4.65
Market price =
Problem Definition
Price/Earnings Ratio = Market Price / Earnings Per Share
e.
13 = $??? / $4.65
Market price = $60.45
Problem Definition
Price/Earnings Ratio = Market Price / Earnings Per Share
a. Calculate return on investment, based on net income and average total assets, for 2011 and 2010. Show both margin and turnover in your calculation.
b. Calculate return on equity for 2011 and 2010.c. Calculate working capital and the current ratio for each
of the past three years. d. Calculate earnings per share for 2011 and 2010.e. If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2011, what was the market price of the stock?f. Calculate the cash dividend per share for 2011 and
the dividend yield based on the market price calculated in part e.
Problem Definition
f.
Problem Definition
Cash dividends per share = Total cash dividends / Weighted average shares
outstanding
f.
$50 million
Problem Definition
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
f.
$50 million / 41.3 million
Problem Definition
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
f.
$50 million / 41.3 million = $1.21
Problem Definition
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
f.
$50 million / 41.3 million = $1.21
Problem Definition
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
Dividend yield = Cash dividends per share / Market price per share
f.
$50 million / 41.3 million = $1.21
$1.21 per share
Problem Definition
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
Dividend yield = Cash dividends per share / Market price per share
f.
$50 million / 41.3 million = $1.21
$1.21 per share / $60.45 per share
Problem Definition
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
Dividend yield = Cash dividends per share / Market price per share
f.
$50 million / 41.3 million = $1.21
$1.21 per share / $60.45 per share = 2%
Problem Definition
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
Dividend yield = Cash dividends per share / Market price per share
g. Calculate the dividend payout ratio for 2011.h. Assume that accounts receivable at December 31, 2011,
totaled $309 million. Calculate the number of days’ sales in receivables at that date.
i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2011 and 2010.
j. Calculate the times interest earned factor for 2011 and 2010.
k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.
Problem Definition
g.
Problem Definition
Dividend payout ratio = Dividends per share / Earnings per share
g.
$1.21 per share
Problem Definition
Dividend payout ratio = Dividends per share / Earnings per share
g.
$1.21 per share / $4.65 per share
Problem Definition
Dividend payout ratio = Dividends per share / Earnings per share
g.
$1.21 per share / $4.65 per share = 26%
Problem Definition
Dividend payout ratio = Dividends per share / Earnings per share
g. Calculate the dividend payout ratio for 2011.h. Assume that accounts receivable at December 31,
2011, totaled $309 million. Calculate the number of days’ sales in receivables at that date.
i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2011 and 2010.
j. Calculate the times interest earned factor for 2011 and 2010.
k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.
Problem Definition
h.
Problem Definition
Average days’ sales = Annual sales / 365 days
h.
$3,050 million
Problem Definition
Average days’ sales = Annual sales / 365 days
h.
$3,050 million / 365 days
Problem Definition
Average days’ sales = Annual sales / 365 days
h.
$3,050 million / 365 days = $8.356 million
Problem Definition
Average days’ sales = Annual sales / 365 days
h.
$3,050 million / 365 days = $8.356 million
Problem Definition
Average days’ sales = Annual sales / 365 days
Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales
h.
$3,050 million / 365 days = $8.356 million
$309 million
Problem Definition
Average days’ sales = Annual sales / 365 days
Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales
h.
$3,050 million / 365 days = $8.356 million
$309 million / $8.356 million
Problem Definition
Average days’ sales = Annual sales / 365 days
Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales
h.
$3,050 million / 365 days = $8.356 million
$309 million / $8.356 million = 37.0 days
Problem Definition
Average days’ sales = Annual sales / 365 days
Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales
g. Calculate the dividend payout ratio for 2011.h. Assume that accounts receivable at December 31, 2011,
totaled $309 million. Calculate the number of days’ sales in receivables at that date.
i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2011 and 2010.
j. Calculate the times interest earned factor for 2011 and 2010.
k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.
Problem Definition
i.
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
i.
12/31/11 debt ratio =
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
i.
12/31/11 debt ratio = ($562 + $1,521)
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/10 debt ratio =
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/10 debt ratio = ($803 + $982)
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/10 debt ratio = ($803 + $982) / $2,811
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/10 debt ratio = ($803 + $982) / $2,811 = 63.5%
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/10 debt ratio = ($803 + $982) / $2,811 = 63.5%
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
Debt/equity ratio = Total liabilities / Total owners’ equity
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/10 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/11 debt/equity ratio =
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
Debt/equity ratio = Total liabilities / Total owners’ equity
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/10 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/11 debt/equity ratio = ($562 + $1,521)
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
Debt/equity ratio = Total liabilities / Total owners’ equity
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/10 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/11 debt/equity ratio = ($562 + $1,521) / $1,007
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
Debt/equity ratio = Total liabilities / Total owners’ equity
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/10 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/11 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
Debt/equity ratio = Total liabilities / Total owners’ equity
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/10 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/11 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%
12/31/10 debt/equity ratio =
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
Debt/equity ratio = Total liabilities / Total owners’ equity
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/10 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/11 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%
12/31/10 debt/equity ratio = ($803 + $982)
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
Debt/equity ratio = Total liabilities / Total owners’ equity
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/10 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/11 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%
12/31/10 debt/equity ratio = ($803 + $982) / $1,026
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
Debt/equity ratio = Total liabilities / Total owners’ equity
i.
12/31/11 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/10 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/11 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%
12/31/10 debt/equity ratio = ($803 + $982) / $1,026 = 174%
Problem Definition
Debt ratio = Total liabilities / (Total liabilities + owners’ equity)
Debt/equity ratio = Total liabilities / Total owners’ equity
g. Calculate the dividend payout ratio for 2011.h. Assume that accounts receivable at December 31, 2011,
totaled $309 million. Calculate the number of days’ sales in receivables at that date.
i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2011 and 2010.
j. Calculate the times interest earned factor for 2011 and 2010.
k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.
Problem Definition
j.
Problem Definition
Times interest earned = Operating income / Interest expense
j.
For 2011 =
Problem Definition
Times interest earned = Operating income / Interest expense
j.
For 2011 = $296
Problem Definition
Times interest earned = Operating income / Interest expense
j.
For 2011 = $296 / $84
Problem Definition
Times interest earned = Operating income / Interest expense
j.
For 2011 = $296 / $84 = 3.5 times
Problem Definition
Times interest earned = Operating income / Interest expense
j.
For 2011 = $296 / $84 = 3.5 times
For 2010 =
Problem Definition
Times interest earned = Operating income / Interest expense
j.
For 2011 = $296 / $84 = 3.5 times
For 2010 = $310
Problem Definition
Times interest earned = Operating income / Interest expense
j.
For 2011 = $296 / $84 = 3.5 times
For 2010 = $310 / $65
Problem Definition
Times interest earned = Operating income / Interest expense
j.
For 2011 = $296 / $84 = 3.5 times
For 2010 = $310 / $65 = 4.8 times
Problem Definition
Times interest earned = Operating income / Interest expense
g. Calculate the dividend payout ratio for 2011.h. Assume that accounts receivable at December 31, 2011,
totaled $309 million. Calculate the number of days’ sales in receivables at that date.
i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2011 and 2010.
j. Calculate the times interest earned factor for 2011 and 2010.
k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.
Problem Definition
k. A young, single professional would probably be more interested in potential growth of capital rather than current dividend income, and would probably be willing to invest in a stock that represented a relatively risky investment. Based on these criteria, the significant growth in earnings per share and the relatively high financial leverage could make this stock an attractive, though risky, potential investment.
(continued)
Problem Definition
k. The liquidity of the company is relatively low, based on an “average” current ratio of 1.0. Without further information about the composition of current assets and current liability accounts, it is difficult to assess the firm’s liquidity. The number of days’ sales in accounts receivable indicates that the accounts receivable are relatively current, assuming that the credit terms are net 30.
(continued)
Problem Definition
k. (concluded)
The company’s ROI is relatively low, and the
two-year trend is down. This would be a major concern, and the reasons for this situation would be sought. The price/earnings ratio of 13 is typical for a firm with a falling ROI; the fact that the P/E ratio has remained within the “normal” range may indicate that future earnings prospects for the firm are fairly strong.
Problem Definition
AccountingWhat the Numbers Mean 9e
David H. MarshallWayne W. McManus
Daniel F. Viele
You should now have a better understandingof ratio analysis.
Remember that there is a demonstration problem for each chapter that is here for your learning benefit.