Post on 06-Feb-2018
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Analyzing Financial Statements Using RatiosA financial statement ratio is computed by dividing the total dollar amount of one item reported in the financial statements by the dollar amount of another item reported. The purpose is to express a relationship between two relevant items that is easy to interpret and compare with other information. For example, the relationship of current assets to current liabilities called the current ratio is of interest to most users. For a firm reporting current assets of $210 000 and current liabilities of $120 000, the current ratio is 1.75 (210000/120000). This means that the company has $1.75 in current assets for every $1.00 of its liabilities.
The relationship could be converted to a percentage (175%) by multiplying the ratio by 100. In ratio form or as a percentage, the relationship between the two items can be more easily compared to other standards, such as the current ratio of other companies, or an industry wide ratio.
Ratios are classified according to their evaluation of a firm’s profitability, liquidity, and solvency. In addition, there are certain ratios that are used to measure short term (less than a year) and long term (more than a year).
Calculating RatiosThe following are comparative financial statements for the Clark Corporation.
Using the following information, calculate the following ratios. First state the formula, then perform the calculation.
Ratio Formula Calculation
Return on Total Assets
Return on Common Stockholders’ Equity
Return on Sales
Earnings per Share
Price Earnings Ratio
Dividend Yield
Dividend Payout
Current Ratio
Receivable Turnover
Inventory Turnover
Debt to Total Assets
Time Interest Earned