UNIVERSITY OF EDUCATION

Program:

BBA (Hons)

Assignment:

Business Finance

Course code:

EDUCC2118

Submitted To:

Ma’am Rabia Fayyaz

Submitted By:

Areej waheed

Aqsa Shehbaz

Faryal Mushtaq

Armisha Gul

Fizza Waheed
 "Financial Statement Analysis" - Integrative Ratio Analysis

Complete Ratio Analysis- McDougal Printings , Inc.

Industry
Actual Actual Actual 2019-
Ratio Formulae Average
2017 2018 calculated
2019
Current
Current Ratio Assets/Current 1.40 1.55 1.67 1.85
Liabilities
= Liquid current
asset + Marketable
Quick Ratio securities + 1.00 0.92 0.88 1.05
Receivables /Current
liabilities
Account
Average
receivable/ 45.6 Days 36.9 days 29.2 days 35.5 days
Collection Period (Sales/no. of days)
Accounts Payable /
Average Payment 46.4 days
(Credit Purchases / 59.3 days 61.6 days 52.98 days
Period Number of Days)
Inventory Cost of goods
9.52 7.89
Turnover Ratios sold/Inventory
Total asset net sales/total
0.74 0.80 0.83 0.74
Turnover assets
total
Debt ratio liabilities/total 0.20 0.20 0.35 0.30
asset
Interest coverage
Nill. 8.2 7.3 8.0
ratio
Gross profit gross
0.30 0.27 0.25 0.25
margin profit/revenue
Operating
Operating profit
income/sales 0.12 0.12 0.13 0.10
margin revenue
Net profit Net income/total
sales
0.062 0.062 0.07 0.053
margin
Net Income/Total
Return on assets 0.045 0.050 0.05 0.040
Asset
Net
Return on equity Income/Shareholders 0.061 0.067 0.09 0.066
equity
(Net income -
Earnings per preferred dividends)
/ weighted average
$1.75 $2.20 $3.05 $1.50
share
of common shares.
 i. Current Ratio:

Current ratio = Current Assets/Current Liabilities

=2000000/1200000

= 1.67

Time series improving and Cross sectional fair. Generally the higher the current ratio, the more
liquid the firm is considered to be.

ii. Quick Ratio:

Quick ratio = Liquid current asset + Marketable securities + Receivables /Current liabilities

= (200000+50000+800000)/ 1200000 =1050000/1200000

= 0.875

Time series deteriorating and Cross sectional poor.

iii. Average Collection Period:

Average collection period = Account receivable/ (Sales/number of days)

= 800000/ (10000000/365)

= 29.2 days

Time series improving and better than the preceding years whilst Cross sectional analysis yields
a good result which is better than the industry average. Their collection methods are good and
have improved progressively over the past two years.
iv. Average Payment Period:

Average payment period = Accounts Payable / (Credit Purchases / Number of Days)

= 900000/ (6200000/365)

= 52.98 days

Time series unstable and Cross sectional poor.

v. Inventory Turnover Ratios:

Inventory turnover = Cost of goods sold/Inventory

= 7500000/950000

= 7.89

Time series deteriorating and lower than the preceding years whilst Cross sectional analysis
yields a fair result which is lower than the industry average. This might indicate excessive or
obsolete inventory.

vi. Total asset Turnover:

Total asset turnover = net sales/total assets

= 10000000/12000000

= 0.83

Time series improving and Cross sectional good.

vii. Debt ratio:

Debt ratio = total liabilities/total asset

= 4200000/12000000

= 0.35

Time series increasing and Cross sectional fair.

viii. Interest coverage ratio:

Time series deteriorating and Cross sectional poor.

ix. Gross profit margin:

Gross profit margin = gross profit/revenue

= 2500000/10000000

= 0.25

Time series deteriorating and Cross sectional good.

x. Operating profit margin:

Operating profit margin = Operating income/sales revenue

=1300000/10000000

= 0.13

Time series improving and Cross sectional good.

xi. Net profit margin:

Net profit margin= Net income/total sales

= 660000/10000000
 = 0.066

Time series stable and Cross sectional good.

xii. Return on assets:

Return on total assets (ROA) = Net Income/Total Asset

= 660000/12000000

= 0.055

Time series improving and Cross sectional good.

xiii. Return on equity:

Return on common equity (ROE) = Net Income/Shareholders equity

= 660000/7800000

= 0.084

Time series improving and Cross sectional good.

xiv. Earnings per share:

Earnings per share (EPS) = (Net income - preferred dividends) / weighted average of common
shares outstanding during the period

= 610000/200000

= 3.05

Time series improving and Cross sectional good.

Liquidity:

McDougal Printings, Inc. overall liquidity as reflected by the current ratio, net working capital,
and acid-test ratio appears to have remained relatively stable but is below the industry average.
Activity: The activity of accounts receivable has improved, but inventory turnover has
deteriorated and is currently below the industry average. The firm's average payment period
appears to have improved from 2017, although the firm is still paying more slowly than the
average company.

Debt:

The firm's debt ratios have increased from 2017 and are very close to the industry averages,
indicating currently acceptable values but an undesirable trend. The firm's fixed payment
coverage has declined and is below the industry average figure, indicating deterioration in
servicing ability.

Profitability:

The firm's gross profit margin, while in line with the industry average, has declined, probably
due to higher cost of goods sold. The operating and net profit margins have been stable and are
also in the range of industry averages. Both the return on total assets and return on equity appear
to have improved slightly and are better than the industry averages. Earnings per share made a
significant increase in 2018 and 2019.

Market:

The firm's price to earnings ratio was good in 2017 but has fallen significantly over 2018 and
2019. The ratio is well below industry average. The market to book ratio initially showed signs
of weakness in 2018 but recovered some strength in 2019. The markets interpretation of
McDougal Printings, Inc. earning ability indicates a lot of uncertainty.

In summary, the firm needs to attend to inventory and accounts payable and should not incur
added debts until its leverage and fixed-charge coverage ratios are improved. Other than these
indicators, the firm appears to be doing well especially in generating return on sales. The market
seems to have some lack of confidence in the stability of McDougal Printing’s. future.