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Complete the Financial Performance Calculations worksheet.  ADDITIONAL INSTRUCTION ON THIS ASSIGNMENT 1. There are a total of 13 problems (WORTH = 130 POINTS) and 1 Financial Performance Summary (WORTH 70 POINTS). 2. Again, each problem is worth 10 points for a total of 130 points for all the Excel exercises. The section on the Financial Performance Summary is worth 70 points. 3. Based on the calculations of the financial ratios, write a BRIEF summary on the financial position of Hillside Inc. This is worth 70 points. Use the following link to read how to write this summary: How to use financial ratios to write financial performance  (I have uploaded the attachments to assist you) 4. Note that you need to make an adjustment on the Excel cell so that as you type into the box or cell the content remains inside the box. Follow the instructions below: How to wrap text in Excel F O L L O W U SF O L L O W U S TRUSTe The Balance Small Business is part of the Dotdash publishing family. A B O U T U SA B O U T U S A D V E R T I S EA D V E R T I S E E D I T O R I A L G U I D E L I N E SE D I T O R I A L G U I D E L I N E S C A R E E R SC A R E E R S C O N T A C TC O N T A C T C O O K I E P O L I C YC O O K I E P O L I C Y T E R M S O F U S ET E R M S O F U S E P R I V A C Y P O L I C YP R I V A C Y P O L I C Y C A L I F O R N I A P R I V A C Y N O T I C EC A L I F O R N I A P R I V A C Y N O T I C E Financial Ratio Analysis Tutorial Business owners tend to dislike the Dnancial management of their Drm. Who can blame them!? It certainly isnt as fun as marketing or advertising or developing an e- commerce site. But, there is one thing about learning about the Dnancial management of your business Drm. It is absolutely necessary. So, you gotta suck it up and learn it. This Drst Dnancial ratio analysis tutorial, the Drst in a series of tutorials on Dnancial ratio analysis Im writing, will get you started. This tutorial is going to teach you to do a cursory Dnancial ratio analysis of your company with only 13 ratios. Yes, with only 13 Dnancial ratios, you can get a pretty good idea of where your company stands. Of course, you need either past Dnancial statements to compare your current Dnancial statements against or you need industry data. In this tutorial, Ill use past Dnancial statements and do a time-series analysis. Maybe in another tutorial, Ill show you how to do a cross-sectional with industry Dnancial ratio analysis. Here is the balance sheet we are going to use for our Dnancial ratio tutorial. You will notice there are two years of data for this company so we can do a time- series (or trend) analysis and see how the Drm is doing across time. Here is the complete income statement for the Drm for which we are doing Dnancial ratio analysis. We are doing two years of Dnancial ratio analysis for the Drm so we can compare them. Refer back to the income statement and balance sheet as you work through the tutorial. The Drst ratios I recommend analyzing to start getting a Dnancial picture of your Drm measure your liquidity or your ability to convert your current assets to cash quickly. They are two of the thirteen ratios. Lets look at the current ratio and the quick (acid-test) ratio. The Current Ratio The current ratio measures how many times you can cover your current liabilities. The quick ratio measures how many times you can cover your current liabilities without selling any inventory and so is a more stringent measure of liquidity. Remember that we are doing a time series analysis, so we will be calculating the ratios for each year. Current RatioCurrent Ratio: For 2010, take the Total Current Assets and divide them by the Total Current Liabilities. You will have: Current Ratio = 642/543 = 1.18X. This means that the company can pay for its current liabilities 1.18 times over. Practice calculating the current ratio for 2011. Your answer for 2011 should be 1.54X. A quick analysis of the current ratio will tell you that the companys liquidity has gotten just a little bit better between 2010 and 2011 since it rose from 1.18X to 1.54X. The Quick Ratio Quick Ratio: In order to calculate the quick ratio, take the Total Current Ratio for 2010 and subtract out Inventory. Divide the result by Total Current Liabilities. You will have: Quick Ratio = 642-393/543 = 0.46X. For 2011, the answer is 0.52X. Like the current ratio, the quick ratio is rising and is a little better in 2011 than in 2010. The Drms liquidity is getting a little better. The problem for this company, however, is that they have to sell inventory in order to pay their short-term liabilities and that is not a good position for any Drm to be in. This is true in both 2010 and 2011. This Drm has two sources of current liabilities - accounts payable and notes payable. They have bills that they owe to their suppliers (accounts payable) plus they apparently have a bank loan or a loan from some alternative source of Dnancing. We dont know how often they have to make a payment on the note. Asset management ratios are the next group of Dnancial ratios that should be analyzed. They tell the business owner how eiciently they employ their assets to generate sales. Assume ALL sales are on credit. Receivables Turnover Receivables Turnover = Credit Sales/Accounts Receivable = ___ X so: Receivables Turnover = 2,311/165 = 14X A receivables turnover of 14X in 2010 means that all accounts receivable are cleaned up (paid ok) 14 times during the 2010 year. For 2011, the receivables turnover is 15.2. Look at 2010 and 2011 Sales in Step 3, The Income Statement and Step 2, The Balance Sheet. The receivables turnover is rising from 2010 to 2011. We cant tell if this is good or bad. We would really need to know what type of industry this Drm is in and get some industry data to compare to. Customers paying ok receivables is, of course, good. But, if the receivables turnover is way above the industrys, then the Drms credit policy may be too restrictive. Average Collection Period Average collection period is also about accounts receivable. It is the number of days, on average, that it takes a Drms customers to pay their credit accounts. Together with receivables turnover, average collection helps the Drm develop its credit and collections policy. Average Collection Period = Accounts Receivable/Average Daily Credit Sales* *To arrive at average daily credit sales, take credit sales and divide by 360 For 2010: Average Collection Period = $165/2311/360 = $165/6.42 = 26 days In 2011, the average collection period is 23.5 days From 2010 to 2011, the average collection period is dropping. In other words, customers are paying their bills more quickly. Compare that to the receivables turnover ratio. Receivables turnover is rising and average collection period is falling. This makes sense because customers are paying their bills faster. The company needs to compare these two ratios to industry averages. In addition, the company should take a look at its credit and collections policy to be sure they are not too restrictive. Take a look at the image above and you can see where the numbers came from on the balance sheets and income statements. Along with the accounts receivable ratios, we analyzed in Step 5, we also have to analyze how eiciently we generate sales with our other assets - inventory, plant and equipment, and our total asset base. Inventory Turnover Ratio The inventory turnover ratio is one of the most important ratios a business owner can calculate and analyze. If your business sells products as opposed to services, then inventory is an important part of your equation for success. Inventory Turnover = Sales/Inventory = ______ X If your inventory turnover is rising, that means you are selling your products faster. If it is falling, you are in danger of holding obsolete inventory. A business owner has to Dnd the optimal inventory turnover ratio where the ratio is not too high and there are no stockouts or too low where there is obsolete money. Both are costly to the Drm. For this company, their inventory turnover ratio for 2010 is: Inventory Turnover Ratio = Sales/Inventory = 2311/393 = 5.9X This means that this company completely sells and replaces its inventory 5.9 times every year. In 2011, the inventory turnover ratio is 6.8X. The Drms inventory turnover is rising. This is good in that they are selling more products. The business owner should compare the inventory turnover with the inventory turnover ratio with other Drms in the same industry. Fixed Asset Turnover The Dxed asset turnover ratio analyzes how well a business uses its plant and equipment to generate sales. A business Drm does not want to have either too little or too much plant and equipment. For this Drm for 2010: Fixed Asset Turnover = Sales/Fixed Assets = 2311/2731 = 0.85X For 2011, the Dxed asset turnover is 1.00. The Dxed asset turnover ratio is dragging down this company. They are not using their plant and equipment eiciently to generate sales as, in both years, Dxed asset turnover is very low. Total Asset Turnover The total asset turnover ratio sums up all the other asset management ratios. If there are problems with any of the other total assets, it will show up here, in the total asset turnover ratio. Total Asset Turnover = Sales/Total Asset Turnover = Sales/Total Assets = 2311/3373 = 0.69X for 2010. For 2011, the total asset turnover is 0.66X. The total asset turnover ratio is somewhat concerning since it was not even 1X for either year. This means that it was not very eicient. In other words, the total asset base was not very eicient in generating sales for this Drm in 2010 or 2011. Why? It seems to me that most of the problem lies in the Drms Dxed assets. They have too much plant and equipment for their level of sales. They either need to Dnd a way to increase their sales or sell ok some of their plant and equipment. The Dxed asset turnover ratio is dragging down the total asset turnover ratio and the Drms asset management in general. There are three debt management ratios that help a business owner evaluate the company in light of its asset base and earning power. Those ratios are the debt to assets ratio, the times interest earned ratio, and the Dxed charge coverage ratios. Other debt management ratios exist, but these help give business owners the Drst look at the debt position of the company and the prudence of that debt position. Debt to Assets Ratio The Drst debt ratio that is important for the business owner to understand is the debt to assets ratio; in other words, how much of the total asset base of the Drm is Dnanced using debt Dnancing. For example. the debt to assets ratio for 2010 is: Total Liabilities/Total Assets = $1074/3373 = 31.8\% - This means that 31.8\% of the Drms assets are Dnanced with debt. In 2011, the debt ratio is 27.8\%. In 2011, the business is using more equity Dnancing than debt Dnancing to operate the company. We dont know if this is good or bad since we do not know the debt to assets ratio for Drms in this companys industry. However, we do know that the company has a problem with their Dxed asset ratio which may be akecting the debt to assets ratio. Times Interest Earned Ratio The times interest earned ratio tells a company how many times over a Drm can pay the interest that it owes. Usually, the more times a Drm can pay its interest expense the better. The times interest earned ratio for this Drm for 2010 is: Times Interest Earned = Earnings Before Interest and Taxes/Interest = 276/141 = 1.95X For 2011, the times interest earned ratio is 3.3X The times interest earned ratio is very low in 2010 but better in 2011. This is because the debt to assets ratio dropped in 2011 in 2011. Fixed Charge Coverage The Dxed charge coverage ratio is very helpful for any company that has any Dxed expenses they have to pay. One Dxed charge (expense) is interest payments on debt, but that is covered by the times interest earned ratio. Another Dxed charge would be lease payments if the company leases any equipment, a building, land, or anything of that nature. Larger companies have other Dxed charges which can be taken into account. Fixed charge coverage = Earnings Before Fixed Charges and Taxes/Fixed Charges = _____X In both 2010 and 2011 for the company in our example, its only Dxed charge is interest payments. So, the Dxed charge coverage ratio and the times interest earned ratio would be exactly the same for each year for each ratio. The last group of Dnancial ratios that business owners usually tackle are the proDtability ratios as they are the summary ratios of the 13 ratio group. They tell the business Drm how they are doing on cost control, eicient use of assets, and debt management, which are three crucial areas of the business. Net Profit Margin The net proDt margin measures how much each dollar of sales contributes to proDt and how much is used to pay expenses. For example, if a company has a net proDt margin of 5\%, this means that 5 cents of every sales dollar it takes in goes to proDt and 95 cents goes to expenses. For 2010, here is XYZ, Incs net proDt margin: Net ProDt Margin = Net Income/Sales Revenue = 89.1/2311 = 3.9\% For 2011, the net proDt margin is 6.5\%, so there was quite an increase in their net proDt margin. You can see that their sales took quite a jump plus their cost of goods sold fell. That is the best of both worlds when sales rise and costs fall. Bear in mind, the company can still have problems even if this is the case. Return on Assets The return on assets ratio also called return on investment, relates to the Drms asset base and what kind of return they are getting on their investment in their assets. Look at the total asset turnover ratio and the return on asset ratio together. If total asset turnover is low, the return on assets is going to be low because the company is not eiciently using its assets. Another way to look at return on assets is in the context of the Dupont method of Dnancial analysis. This method of analysis shows you how to look at return on assets in the context of both the net proDt margin and the total asset turnover ratio. To calculate the Return on Assets ratio for XYZ, Inc. for 2010, heres the formula: Return on Assets = Net Income/Total Assets = 2.6\% For 2011, the ROA is 5.2\%. The increased return on assets in 2011 rerects the increased sales, reduced costs, and much higher net income for that year. Return on Equity The return on equity ratio is the one of most interest to the shareholders or investors in the Drm. This ratio tells the business owner and the investors how much income per dollar of their investment the business is earning. This ratio can also be analyzed by using the Dupont method of Dnancial ratio analysis. The companys return on equity for 2010 was: Return on Equity = Net Income/Shareholders Equity = 3.9\% For 2011, the return on equity was 7.2\%. One reason for the increased return on equity was the increase in net income. When analyzing the return on equity ratio, the business owner also has to take into consideration how much of the Drm is Dnanced using debt and how much of the Drm is Dnanced using equity. Now we have a summary of all 13 Dnancial ratios for XYZ Corporation. The Drst thing that jumps out is the low liquidity of the company. We can look at the current and quick ratios for 2010 and 2011 and see that the liquidity is slightly increasing between 2010 and 2011, but it is still very low. By looking at the quick ratio for both years, we can see that this company has to sell inventory in order to pay ok short-term debt. The company does have short-term debt - accounts payable and notes payable, and we dont know when the notes payable will come due. Lets move on to the asset management ratios. We can see that the Drms credit and collections policies might be a little restrictive by looking at the high receivable turnover and low average collection period. Customers must pay this company rapidly - perhaps too rapidly. There is nothing particularly remarkable about the inventory turnover ratio, but the Dxed asset turnover ratio is remarkable. The Dxed asset turnover ratio measures the companys ability to generate sales from its Dxed assets or plant and equipment. This ratio is very low for both 2010 and 2011. This means that XYZ has a lot of plant and equipment that is unproductive. It is not being used eiciently to generate sales for the company. In addition, the company has to service the plant and equipment, pay for breakdowns, and perhaps pay interest on loans to buy it through long-term debt. It seems that a very low Dxed asset turnover ratio might be a major source of problems for XYZ. The company should sell some of this unproductive plant and equipment, keeping only what is absolutely necessary to produce their product. The low Dxed asset turnover ratio is dragging down total asset turnover. If you follow this analysis on through, you will see that it is also substantially lowering this Drms return on assets proDtability ratio. With this Drm, it is hard to analyze the companys debt management ratios without industry data. We dont know if XYZ is a manufacturing Drm or a dikerent type of Drm. As a result, analyzing the debt to asset ratio is diicult. What we can see, however, is that the company is Dnanced more with shareholder funds (equity) than it is with debt as the debt to asset ratio for both years is under 50\% and dropping. This fact means that the return on equity proDtability ratio will be lower than if the Drm was Dnanced more with debt than with equity. On the other hand, the risk of bankruptcy will also be lower. Unfortunately, you can see from the times interest earned ratio that the company does not have enough liquidity to be comfortable servicing its debt. The companys costs are high and liquidity is low. Fortunately, the companys net proDt margin is increasing because their sales are increasing and their costs are decreasing. Hopefully, this is a trend that will continue. Return on Assets is impacted negatively due to the low Dxed asset turnover ratio and, to some extent, by the receivables ratios. Return on Equity is increasing from 2010 from 2011, which will make investors happy. As you can see, it is possible to do a cursory Dnancial ratio analysis of a business Drm with only 13 Dnancial ratios, even though ratio analysis has inherent limitations. B U S I N E S S F I N A N C E B U S I N E S S F I N A N C E S M A L L B U S I N E S SS M A L L B U S I N E S S B YB Y Updated November 20, 2019R O S E M A R Y C A R L S O NR O S E M A R Y C A R L S O N The Balance Sheet for Financial Ratio Analysis0101 rpeavler Advertisement $69.97 $73.97 $102.97 $150 Advertisement $150 $102.97 $70 $150 Advertisement The Income Statement for Financial Ratio Analysis0202 rpeavler Advertisement $150 $102.97 Advertisement Analyzing The Liquidity Ratios0303 rpeavler Advertisement Advertisement Analyzing the Asset Management Ratios Accounts Receivable 0404 rpeavler • • • • • • Inventory, Fixed Assets, Total Assets0505 rpeavler Analyzing the Debt Management Ratios0606 rpeavler • • • Analyzing the Profitability Ratios0707 rpeavler • • Financial Ratio Analysis of XYZ Corporation0808 rpeavler S M A L L B U S I N E S SS M A L L B U S I N E S S What Is Financial Ratio Analysis? S M A L L B U S I N E S SS M A L L B U S I N E S S What You Should Know About ProDtability Ratio Analysis S M A L L B U S I N E S SS M A L L B U S I N E S S How Your Firm Can Generate Sales With Eiciency and Turnover Ratios S M A L L B U S I N E S SS M A L L B U S I N E S S Is Your Business Successful? Understanding Fixed Asset Turnover Ratio S M A L L B U S I N E S SS M A L L B U S I N E S S How Do You Do Financial Statement Analysis? S M A L L B U S I N E S SS M A L L B U S I N E S S Debt Management Ratios Tutorial S M A L L B U S I N E S SS M A L L B U S I N E S S Learn About Asset Turnover Ratios to Help You Generate Revenue F I N A N C I A L M A N A G E M E N TF I N A N C I A L M A N A G E M E N T Important Ratios for Cash Flow Analysis S M A L L B U S I N E S SS M A L L B U S I N E S S Ratios to Assess a Company A C C O U N T I N G B A S I C SA C C O U N T I N G B A S I C S The 3 Types of Accounting in Small Business S M A L L B U S I N E S SS M A L L B U S I N E S S Calculate ROI with the Dupont Model B U S I N E S S P L A N N I N GB U S I N E S S P L A N N I N G Give Your Business a Health Checkup with These Financial Ratios S M A L L B U S I N E S SS M A L L B U S I N E S S Calculating Return on Invested Capital (ROIC) S M A L L B U S I N E S SS M A L L B U S I N E S S How to Calculate and Use the Fixed Charge Coverage Ratio S M A L L B U S I N E S SS M A L L B U S I N E S S What the Debt-to-Asset Ratio Can Tell You About Your Company S M A L L B U S I N E S SS M A L L B U S I N E S S Total Asset Turnover Ratio: How Is It Calculated? S H A R E T H I S A R T I C L ES H A R E T H I S A R T I C L E A d v e rt is e m e n t S T A R T I N G A B U S I N E S SS T A R T I N G A B U S I N E S S O P E R A T I O N SO P E R A T I O N S R E S O U R C E SR E S O U R C E S https://www.facebook.com/thebalancecom/ https://twitter.com/thebalance/ https://www.instagram.com/thebalancecom/ https://www.linkedin.com/company/the-balance.com/ https://privacy.truste.com/privacy-seal/validation?rid=ca0d012d-694f-4389-96b0-a5ffc246fa42 https://www.thebalancesmb.com/basic-financial-management-4161408 https://www.thebalancesmb.com/financial-statement-analysis-for-your-small-business-firm-393582 https://www.thebalancesmb.com/what-is-the-current-ratio-and-how-do-you-measure-it-393218 https://www.thebalancesmb.com/what-is-the-quick-ratio-and-how-is-it-used-393219 https://www.thebalancesmb.com/what-are-business-liabilities-398321 https://www.thebalancesmb.com/average-collection-period-ratio-393191 https://www.thebalancesmb.com/assets-definition-2947887 https://www.thebalancesmb.com/the-times-interest-earned-ratio-and-what-it-measures-393208 http://www.readyratios.com/reference/profitability https://www.thebalancesmb.com/roi-return-on-investment-1794432 https://www.thebalancesmb.com/how-to-calculate-the-dupont-model-for-roi-analysis-393229 http://www.ccdconsultants.com/documentation/financial-ratios/return-on-equity-interpretation.html http://www.bizstats.com/ http://www.netmba.com/finance/financial/ratios/ https://www.thebalancesmb.com/limitations-of-financial-ratio-analysis-393236 https://www.thebalancesmb.com/business-finance-4161414 https://www.thebalancesmb.com/small-business-financials-4161407 https://www.thebalancesmb.com/ https://www.thebalancesmb.com/becoming-an-owner-4161339 https://www.thebalancesmb.com/operations-and-success-4161432 https://www.thebalancesmb.com/business-learning-center-4161621 Problem for Students Hillside, Inc. BALANCE SHEET INCOME STATEMENT ($ in millions) ($ in millions) ASSETS LIABILITIES Revenue 28,681.10 Cash & Marketable Securities 449.90 Accounts Payable 1,611.20 Cost Of Goods Sold 20,768.80 Accounts Receivable 954.80 Salaries Payable 225.20 Gross Profit 7,912.30 Inventories 3,645.20 Other Current Liabilities 1,118.80 Other Current Assets 116.60 Total Current Liabilities 2,955.20 Operating Expenses: Total Current Assets 5,166.50 Selling, General & Admin. 5,980.80 Other Liabilities 693.40 Depreciation 307.30 Machinery & Equipment 1,688.90 Operating income 1,624.20 Land 1,129.70 Total Liabilities 3,648.60 Buildings 2,348.40 Interest - 0 Depreciation (575.60) SHAREHOLDERS EQUITY Other Expense (Income) (13.10) Property, Plant & Equip. - Net 4,591.40 Common Stock 828.50 Income Before Taxes 1,637.30 Other Long Term Assets 120.90 Retained Earnings 5,401.70 Income Taxes 618.10 Total Long-Term Assets 4,712.30 Total Shareholders Equity 6,230.20 Net Income 1,019.20 Total Assets 9,878.80 Total Liabilities & Equity 9,878.80 Number of Common Stock Shares Outstanding 1,032,271 Input Answers Below Financial Performance Summary LIQUIDITY RATIOS Current Ratio (times) Quick Ratio (times) Average Payment Period (days) ASSET MANAGEMENT RATIOS Total Asset Turnover (times) Average Collection Period (days) Inventory Turnover (times) FINANCIAL LEVERAGE RATIOS Total Debt to Total Assets Equity Multiplier (times) PROFITABILITY RATIOS Operating Profit Margin Net Profit Margin Return on Total Assets Return on Equity Earnings per Share &Arial,Regular&10 Wk 4 Financial Performance Worksheet HCS/385 v4 Page &P of &N &Arial,Regular&10HCS/385 v4 &Arial,Regular&8Copyright© 2020 by University of Phoenix. 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