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Interpreting Financial Results

Review both the Balance Sheet and Income Statement for XYZ Company, Inc.

Calculate the following TEN financial ratios:

  • Quick Ratio
  • Inventory Turnover
  • Accounts Receivable Turnover
  • Total Debt Ratio
  • Debt to Equity Ratio
  • Gross Profit Margin
  • Net Profit Margin
  • Return on Assets (ROA)
  • Return on Equity (ROE)
  • Earnings Per Share (EPS)

Write a summary of your analysis to include the following for EACH ratio:

  • What does the ratio measure?
  • How is it calculated?
  • What is considered a “good” or acceptable figure for the ratio?
  • What is your calculation for the ratio as it relates to XYZ? Is their result acceptable or not?

Grading Outline (9.50 points total):

Introduction – .50 points

Calculation: Quick Ratio – .25 points

Discussion: Quick Ratio – .50 points

Calculation: Inventory Turnover – .25 points **Use AVERAGE Inventory**

Discussion: Inventory Turnover – .50 points 

Calculation: Accounts Receivable Turnover – .25 points ** Average accounts receivable should be used. However, you do not have the beginning accounts receivable figure. So simply use ending accounts receivable on this one.**

Discussion: Accounts Receivable Turnover – .50 points

Calculation: Total Debt Ratio – .25 points

Discussion: Total Debt Ratio – .50 points

Calculation: Debt to Equity Ratio – .25 points

Discussion: Debt to Equity Ratio – .50 points

Calculation: Gross Profit Margin – .25 points

Discussion: Gross Profit Margin – .50 points

Calculation: Net Profit Margin – .25 points

Discussion: Net Profit Margin – .50 points

Calculation: Return on Assets – .25 points

Discussion: Return on Assets – .50 points

Calculation: Return on Equity – .25 points

Discussion: Return on Equity – .50 points

Calculation: Earnings Per Share – .25 points **Assume 1000 Shares**

Discussion: Earnings Per Share – .50 points

Conclusion – .50 points

APA (includes title page, references, spelling, grammar, readability, etc) – 1 point

Required References (make sure to double-space and format into a hanging indent):

Parrino, R., Kidwell, D. S, & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed). Hoboken, NJ: Wiley.

University of Phoenix. (2014). Sample financial statements. Retrieved from University of Phoenix, FIN571 – Corporate Finance website.

Example: Current Ratio (each ratio discussion should be similar to this)

The current ratio is a measure of a firm’s liquidity. It specifically measures a firm’s ability to fulfill its short-term obligations. The current ratio is calculated by dividing current assets by current liabilities. A ratio that is too low could be an indicator of potential cash issues, while a ratio that is too high could be an indicator of capital inefficiency. While an acceptable ratio will depend on several factors, most firms strive for a current ratio between 1 and 2. XYZ, Inc. has a current ratio of 1.74. This ratio falls within the acceptable range which suggests that this firm should be able to fulfill its short-term obligations at this time.

Additional Notes:

I do NOT need to see your actual calculations. All I need is your final number within your discussion paragraph per my example above. So your paper should consists of approximately 12 paragraphs including the intro and summary. Also, there is a list of ratios at the end of Chapter 4 (Summary of Key Ratios).

Don’t get hung up on the verbiage between the statements vs the formularies. For example, Net Income is the same as Net Profit in this case. Cost of Goods Sold is the same as Cost of Sales in this case. Debt is another word for Liabilities so Total Debt is the same as Total Liabilities in this case.

FREEBIES: Net Profit Margin and Gross Profit Margin calculations are already given to you on the P&L Statement if you look closely.

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