Joaquin Nico B.

Ramirez

HM501

07 Activity 2

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: No, if the firm maintains its current stance, it suggests that management only
considers departments with higher operating earnings, implying that they only evaluate
departments with larger profits. from their regular business. Since ROI is a useful indicator for
contrasting each of them, the management of International Heal Medical Company must rely on it
to evaluate or rate the performance of the three divisions. If the firm examined the ROI of each
division, the Splint Division performs best with a ROI of 9%, as compared to the Intensive Care
Division and the Booboo Sector, which produced a ROI of less than 9%. Based on this
information, the Splint Division looks to be outpacing the other two industries, despite the
Intensive Care Division producing the largest operational profit. In addition to concentrating on
profit, the ROI calculation also considers resource usage to assess a company's profitability.

2.) Charlie’s Construction Company is a growing construction business with 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 assets. During the current year, Charlie’s company had a net
income of ₱20,000,000. Compute the company’s return on assets and interpret the results.

ANSWER:

ROA = _______Income________
Average Total Asset

ROA= _____ P20,000,000______

P1,000,000+P2,000,000

ROA= _____P20,000,000______
P3,000,000

Return on Assets = 6.67 or 666.7%

Considering that the ROA result is more than 5% or less than 7%, Charlie's construction business
is earning more profit. even with a lower investment.
3.) Dave’s Guitar Shop is thinking about building an additional property 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. Dave’s total assets is P5,000,000
while his total liabilities is P25,000. Compute Dave’s debt ratio.

ANWSER:

Dept Ratio = ____Total Liabilities____

Total Assets

Dept Ratio = ______25,000______

5,000,000

Dept Ratio = 0.005% or 5%

As the result on the computation, it suggests that all obligations are less than total assets,
showing that the business is stable financially and able to pay back the bank loan.