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.

No, if the company maintains with its original decision, it looks that management is only interested
in the division that generated the largest operational profit, meaning that they are only interested in the
division that generated the most money from its everyday operations. To determine or evaluate their
performance, the management of International Heal Medical Company must rely on the calculated ROI
of the three divisions (calculate ROI as operating profit divided by average assets) since ROI is a good
approach to compare each of them. If the corporation calculated the ROI of each division, they may
conclude that the Splint Division performs the best, with a ROI of 9%, as opposed to the Intensive Care
Division and the Booboo Division, both of which had a ROI of less than 9%. Even though the Intensive
Care Division has the largest operational profit, The Splint Division looks to beat the other two
divisions on this metric. Calculating ROI includes more than just profit entails calculating a company's
profitability by analyzing how its assets are used.

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.

ROA = Income
Average Total Assets

ROA= P20,000.000
P1,000,000+P2,000,000

ROA= P20,000,000
P3,000,000

Return on Assets = 6.667 or 666.7%

 Seeing that ROA result is more than 5%, Charlie's building company makes more money with less
investment.
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.

Debt Ratio = Total Liabilities

Total Assets

Debt Ratio = P25,000

P5,000,000

Debt Ratio = 0.005 or 5%

 It means the total liabilities are lower than assets which mean that the entity is financially healthy, it is a good
sign the entity could pay the bank loan.

Rubric for checking:

CRITERIA POINTS
Complete solution with correct answer 5
Last two (2) major steps of the solution are incorrect 4
Half of the solution is correct 3
First two (2) major steps of the solution are correct 2
First major step of the solution is correct 1

07 Activity 2 *Property of STI

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