Financial Ratios

Financial Ratios

To: James Plastow

From: Nerveen Said

CC:

Date: 05/01/2008

Re: Week 3 assignment

Riordan Manufacturing:

a- Current ratio:

The current ratio formula is: Current assets / Current liabilities.

According to Invetopedia.com “it measures the company’s ability to pay short term obligations.”

The acceptable current ration for most industrial companies is 1.5.

- The current ratio for Riordan Manufacturing (2005)=

14,555,092 / 6,974,094 = 2.1

b- Debt ratio:

The debt ratio formula is: (Total debt / Total assets.) x 100.

According to Investopedia.com: “It indicates what proportion of debt a company has relative to its assets.” It tells the company the potential risks in terms of debt load, and helps the investors to determine the company’s level of risk. .

If the company has a debt ratio greater than 1, that means this company has more debts than assets, and if it is less than 1, it means that the company has more assets than debt. In other words, the greater the amount of debt the greater the financial risk.

- The debt ratio for Riordan Manufacturing (2005)=

(12,476,927 / 34,592,182) x 100 = 36.07%

c- Profit margin:

The profit margin formula is: (Net income after taxes / Revenue (sales)) x 100.

The profit margin measures profit from sales. It tells how much profit a company makes for every $1 it generates in revenue. The higher a company’s profit margin compared to its competitors, the better.

- The profit margin for Riordan Manufacturing (2005) =

(1,956,371 / 50,823,685) x 100 = 3.85%

d- ROA:

The ROA formula is: Net profit margin x Asset turnover

Or

(Net Income / Total assets) x 100.

According to Investopidia.com, ROA “ an indicator of how profitable a company is relative to its total assets.” It tells how efficient management