Quiachon, Nichole A.

BSCM 501-A

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.

Answer:

Return on Investment = Income after Income tax / Average Stockholders Equity x 100

Booboo Division

Return on Asset = ₱24,950 / ₱311,900

= 0.07999358768836165437640269317089 * 100
= 7.999 / 8%

Splint Division

Return on Asset = ₱17,500 / ₱177,950

= 0.09834223096375386344478786175892 * 100
= 9.83%

Intensive Care Division

Return on Asset = ₱28,500 / ₱475,000

= 0.06 * 100
= 6%

As we can see at the solution, Intensive care division has the lowest which has 6% Return on
investment. They might have the high operating profit but when return on investment was computed they
suffer a lot of losses. They should not continue the awarding, and they must compute first the percentage of
the return on investment of each division. Then after checking their data, they should acknowledge the right
division that has a highest return on investment which is the Splint division that has 9.83%.

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.
Answer:

Return on asset = Income / Average Total asset

Net Income- ₱20,000,000

Average total asset - ₱1,000,000 + ₱2,000,000 = ₱3,000,000/2 = ₱1,500,000

Return on Asset = ₱20,000,000 / ₱1,500,000

= 13.33%

Charlie’s Construction Company has a return on asset that has good ratio of 13.33%. For them to get
this high ratio shows how effective their assets are being used and how they can manage it well. Managing
their return on asset on a high ratio means they are doing great in their company, and they knew how to
maintain their assets.

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.

Answer:
Debt Ratio = Total Liabilities / Total Assets
= ₱25,000 / ₱5,000,000
= 0.005 or 0.5%
Dave’s debt ratio is 0.005 or 0.5% from his total liabilities of 25,000 pesos and it was divided by his
total asset of 5,000,000 pesos.