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Business Financial Calculations


The project assignment for module one involves the actual calculation and interpretation of some of the financial ratios you've been reading about. If you haven't reviewed them yet please see this presentation on financial ratios and this this chapter on financial analysis. There are two companies I want you to look at - Arrow Company and Plume Inc. Perform a basic financial analysis of each company by calculating the following ratios:

1. Rate of return on Equity (ROE) = Net Income / Shareholders' Equity

This ratio can be re-written as a product of the three principal components:

ROE = (Net Income/Sales) x (Sales/Assets) x (Assets/Shareholders' Equity)

The three components are actually: profit margin, asset turnover, and financial leverage, respectively.

2. Return on Assets (ROA) = Net income/Total Assets

3. Gross Margin = Gross profit/Sales

4. Inventory turnover = Cost of goods sold / Ending inventory

5. The Collection Period = Accounts receivable/Credit sales per day, where credit sales per day (or simply "sales per day" are computed by dividing total sales for the year by 365.

6. Fixed-asset turnover = Sales/Total fixed assets

7. Financial leverage ratios:

Debt-to-assets ratio = Total liabilities/Total assets

Debt-to-equity ratio = Total liabilities/Shareholders' equity

8. Liquidity ratios:

Current ratio = Current assets/Current liabilities

Acid test = (Current assets - Inventory)/Current liabilities

When you have finished your calculations, summarize them in a brief response. The actual calculations should be in table format and be sure to show how you did the math. I will give partial credit for having a part of the calculation correct!

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Solution Preview

Financial ratios are a simple way for the financial manager to determine the progress of the company over time as it meets financial goals They can also quickly summarize the current status of the budget. Using the 2012 financial statements of Arrow, Inc, here is an explanation of how the attached financial ratios can provide these insights.

There are product specific benchmarks for the retail industry, based on six basic ratios (profit, gross margin, inventory turnover, debt to worth,current ratio, and return on assets. These figures change every year. The benchmarks for Jewelry Stores can be used to determine the comparative success of this company and whether there is room for improvement in financial management.(http://retailowner.com)

1. Rate of return on equity compares the profits that are earned by the business with the money that shareholders invest in the business. It is important to know how much the shareholders is earning, because a major activity of a publicly owned company is to ...

Solution Summary

This paper takes the financial statements of Arrow, Inc, a jewelry store, and calculates the financial ratios in a spreadsheet. It is accompanied by text explaining the usefulness of these calculations when determining the success of a business.