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Sample Problems On Financial Ratios

The document provides 3 sample problems calculating financial ratios for different companies. The first problem analyzes the return on assets (ROA) for three divisions of a medical company. It determines the Intensive Care Division has the highest ROA and is the most efficient at generating profits. The second problem calculates the ROA for a construction company, finding it to be 5%. This is interpreted as a good but not great ROA, meaning the company is reasonably efficient at generating profits. The third problem calculates the debt ratio for a guitar shop, finding it to be 0.5%, a very low debt ratio indicating the company has very little leverage.

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78 views

Sample Problems On Financial Ratios

The document provides 3 sample problems calculating financial ratios for different companies. The first problem analyzes the return on assets (ROA) for three divisions of a medical company. It determines the Intensive Care Division has the highest ROA and is the most efficient at generating profits. The second problem calculates the ROA for a construction company, finding it to be 5%. This is interpreted as a good but not great ROA, meaning the company is reasonably efficient at generating profits. The third problem calculates the debt ratio for a guitar shop, finding it to be 0.5%, a very low debt ratio indicating the company has very little leverage.

Uploaded by

maria suarez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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GE1715

SAMPLE PROBLEMS ON FINANCIAL RATIOS

1. The management of International Heal Medical Company is evaluating the performance of its three (3) divisions.
The Booboo Division had operating profit of ₱24,950 and on average used assets with a book value of ₱311,900. The
Splint Division had an operating profit of ₱17,500 and used average assets of
₱177,950. The Intensive Care Division had an operating profit of ₱28,500 and average assets of
₱475,000. The company is planning to award the Intensive Care Division relying on its high operating profit.
Should the management continue with this decision? Justify your answer.

- Yes, the management center should be continue the operation of their service.Because as I can see,
each and every division has the higher profits.Means the ROA, the more efficient the company is
at generating profits. There are the ability to expand the higher percentage of its assets.

2. Charlie’s Construction Company is a growing construction business that has a few contracts to build storefronts
in Pasay. Charlie’s balance sheet shows beginning assets of ₱1,000,000 and an ending balance of ₱2,000,000
of assets. During the current year, Charlie’s company had a net income of
₱20,000,000. Compute for the company’s return on assets and interpret the results.

- Net income = 20,000,000


Beginning assets = 1,000,000
Ending assets = 2,000,000 ROA=

ROA = 0.5 OR 5%

- Charlie’s construction company has have only (5%) percentage of (ROA)


“RETURN OF ASSETS” means charlie’s constructions have.The 5% is better typically considered
good, while 20% are better is considered great .In general, the higher the ROA, the more effercent.
The construction company is at genereting profits.

3. Dave’s Guitar Shop is thinking about building an addition onto the back of its existing building for more
storage. Dave consults with his banker about applying for a new loan. The bank asks for Dave’s balance to
examine his overall debt levels. The banker discovers that Dave has total assets of ₱5,000,000 and total
liabilities of ₱25,000. Compute for Dave’s debt ratio.

ASSEB = 5,000,000 DEPT RATIO = TOTAL 200


LIABILITIES = 25,000
Dave’s guitar has a lower percentage of ratio,it means the lover percentage
.Then less leverage dept ratio.

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