It Calculate Financial Ratios

Topics: Financial ratio, Financial ratios, Generally Accepted Accounting Principles Pages: 6 (1645 words) Published: January 22, 2012
Calculate Financial Ratios

Riordan Manufacturing’s Calculated Financial Ratio

Current Ratio

The current ratio is the measure of the degree to which current assets cover current liabilities. A ratio of more than one suggests that it can pay most of its debts at that point in time.   The ability to effectively turn products into cash is a good sign of a company's financial state.

Current assets $14,589,092.09 * $14,643,456.43 *
Current liabilities $6,974,094 $6,029,696

Current assets are divided by current liabilities to determine the current ratio.   Riordan's current ratio is 2.10, and this suggests that the company is efficient in operating its business cycle. The industry ratio is 2.98. Riordan’s current ratio is above industry average, which means that Riordan is able to meet short-term obligations or satisfy short-term creditors.

Debt Ratio

The debt ratio reveals the extent to which a company is financed with debt. Creditors look at this ratio when they are trying to decide what the chances are that the company will not be able to make good on the business loans and obligations. A healthy company has a good balance between assets provided through debt and assets provided by the company's owners.

Total liabilities $12,476,927 36.07% $12,160,256 35.91%
Total assets $34,592,182 $33,856,256

The debt ratio is calculated by dividing total liabilities by total assets. Debt ratio measures a firm's total assets that are financed with creditors' funds. It includes all short-term liabilities and long-term borrowings. In order to determine if RMI has borrowed too much we will calculate their debt ratio. The Debt to Equity Ratio measures how much money a company can safely be able to borrow over long periods of time. The normal level of debt to equity depends on economic factors, but a debt to equity ratio of over 40% should be a red flag to look closer for liquidity problems (Lermack, 2003). RMI’s debt ratio is at a healthy ratio of 35.917 and another great ratio of 36.07.

Profit Margin

Gross profit will measure a company’s manufacturing and distribution efficiency during the production process.   In other words, it measures profit generated after consideration of cost of products sold.   The gross profit tells an investor the percentage of revenue / sales left after subtracting the cost of goods sold.   A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled [overhead refers to rent, utilities, etc.]

Gross profit $8,786,061 =17.3% $8,564,238 = 18.6%
Net sales $50,823,685 $46,044,288

Riordan had a gross profit margin of 17% in 2005 and a gross profit margin of 18.6% in 2004. It shows that Riordan margin is below its industry average of 21.94%. ( This is indicating that Riordan pricing policies or its production methods are not quite as effective as those of the average firm in the industry.  

Return on Assets

A low return on assets means that the business should reexamine its credit policies to ensure the timely collection of imparted credit, which will help in earning interest for the firm. The following table provides a comparison of Riordan’s A/R ratio

Net sales $50,823,685 8.7 times $46,044,288 7.54 times
Average A/R $5,860,027 $6,106,688

The ROA is calculated by dividing the outstanding accounts receivable (in an accounting period) by the credit sales revenue or net sales (in the same period).   It is used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.  

Price/Earnings (P/E) Ratios

P/E ratios indicate the price paid for a share relative to the annual income...
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