Financial Statements
The computations are the basis for extracting meaning from the financial statements provided.
Each category heading should appear as a section heading in your final report. An adequate description of a ratios meaning can be accomplished in two to four sentences. For example, Total Asset Turnover is a general efficiency ratio that measures management’s efficient or inefficient use of short-term and long-term assets. The ratio is calculated as follows:
Total Asset Turnover = Sales/Total Assets. Assume sales of $8,000,000 and total assets of
$4,000,000. Total Asset Turnover in this example – $8,000,000/$4.000.000 = 2.
We might describe the calculation as follows:
Total Asset Turnover is a general measure of management’s use of total assets to generate sales.
The larger the number, the better the use of assets. In this case, sales revenue of $2.00 per asset dollar indicates management is using assets reasonable well. A negative ratio would be a concern.
Also note that you are approaching this assignment as an entrepreneur with access to limited information. You have no historical data: the financial statements you are using are your pro forma statements. You also lack access to competitor financials. As such, time-series and cross-sectional benchmarking cannot be accomplished. As such, use your judgment and generally accepted standards about financial ratios to develop meaning as was done in the Total Asset Turnover example above.
Required Ratios
Liquidity Ratios
- Current Ratio
- Quick Ratio
Leverage Ratios
- Debt to Equity
- Debt to Total Assets
- Interest Coverage
Management Efficiency Ratios
- Accounts Receivable Turnover
- Days Sales Outstanding
- Days of Inventory
- Accounts Payable Turnover
Profitability Ratios
- Gross Margin
- Operating Margin
- Return on Assets
- Return on Equity
In your presentation,
- Create an introduction and a strong thesis statement. Identify the limitations that prevent a time-series or cross-sectional analysis of the derived ratios.
- Create a ratio analysis that derives meaning from financial statements by grouping derived ratios under designated four section headings (Liquidity Ratios, etc).
- Create a summary that includes three findings the team feels are significant.