Excel Ratio Analysis By: Justin Lugones April 30, 2003

Ratio’s Overview Current ratio: current assets divided by current liabilities  Should be around two Quick ratio: (current assets – inventory) divided by current liabilities  Should be around one Debt to Asset Ratio: total liabilities divided assets  Measures leverage, risk depending on situation Return on Sales: net income divided by revenue  Higher is better Return on Assets: income (before interest and taxes) divided by total assets  Higher is better Return on Equity: net income divided by total owner’s equity  Higher is better, leverage is working in the company’s favor Average Collection Period: accounts receivable divided by daily sales  Should be around the company’s credit term period (normally 30 days) Average Days of Inventory: inventory divided by daily cost of goods sold  Pro’s and con’s for both high and low numbers, should be compared to past years or other firms in the industry

Set of Ratio’s Division ADivision BDivision CCorporate Current Ratio Quick ratio Debt to Asset ratio Return on Sales5.330%7.387%8.160%7.033% Return on Assets16.134%20.233%21.712%19.614% Return on Equity23.583%22.457%47.619%29.253% Average Collection Period: Average Days of Inventory

Division A is a little high for a current ratio. This division does not earn much on it’s current assets. Quick ratio proves to be beneficial. The division has a decent ability to pay it’s current debts. Division A has the lowest return on sales and assets. Longest Average Collection Period and Average Days in Inventory. 

Division B Similar to Division A, Division B does not capitalize well on it’s current assets is a super number for quick ratio, great ability to pay it’s current debts. Decent return on assets and sales, but lacks on return of equity. Once again, decent Average Collection Period and Average Days in Invetory.

Division C The current ratio and the quick ratio is a little low. This says that this division might have problems paying their liabilities. The debt to asset ratio shows high risk but great potential for high rewards. Return on sales, equity, and assets all are in favor of the division. Average collection period is low which is good. But the average days of inventory is too long for comfort.

Corporation Current and quick ratios are low, but debt to asset ratio is very high. Return on sales is almost at par. Fortunately, return on assets and equity are high. Average collection period is close to 30 days while average days of inventory is high above the desired quantity.