Test Yourself—Problems and Solutions - Financial Ratios [Book] - Free Printable

It looks like you've uploaded a financial statement dataset for a company in 2010, including:

- Balance Sheet (Assets, Liabilities, and Equity)
- Income Statement
- Other Information (Shares, Price per share)

However, no specific question or task was stated. Since you mentioned "I uploaded an image with a task," but no explicit problem is written here, I will assume that you'd like me to analyze the financial data, calculate key financial ratios, and possibly evaluate the firm's financial health based on this information.

Let’s go step-by-step and solve common problems typically asked with such data.

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📌 Step 1: Understand the Data

#### 🔹 Balance Sheet (in $ millions)
| Assets | 2010 |
|-----------|------|
| Current Assets | |
| Cash | 200 |
| Accounts Receivable | 500 |
| Inventory | 400 |
| Total Current Assets | 1,100 |
| Fixed Assets | |
| Property, Plant & Equipment | 2,400 |
| Less: Accumulated Depreciation | (2,100) |
| Net Fixed Assets | 300 |
| Total Assets | 1,400 |

| Liabilities & Equity | 2010 |
|--------------------------|------|
| Current Liabilities | |
| Accounts Payable | 400 |
| Bills Payable | 100 |
| Total Current Liabilities | 500 |
| Long-term Liabilities | |
| Long-term Debt | 200 |
| Total Liabilities | 700 |
| Shareholders’ Equity | |
| Equity Share Capital ($1 par) | 200 |
| Reserves & Surplus | 500 |
| Total Owners' Equity | 700 |
| Total Liabilities & Equity | 1,400 |

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#### 🔹 Income Statement (in $ millions)
| Item | 2010 |
|------|------|
| Sales | 3,400 |
| Cost of Goods Sold | 1,200 |
| Gross Profit | 2,200 |
| Office & Selling Expenses | 600 |
| Depreciation | 102 |
| Earnings Before Interest & Taxes (EBIT) | 1,498 |
| Interest Expense | 10 |
| Earnings Before Taxes (EBT) | 1,488 |
| Taxes | 607 |
| Net Income | 881 |
| Dividends | 635 |
| Transfer to Reserves & Surplus | 246 |

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#### 🔹 Other Information
- Number of shares = 200 million
- Price per share = $7.31

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✔ Let’s Solve Common Financial Problems

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1. Calculate Key Financial Ratios

#### 🔹 Liquidity Ratios

Current Ratio
$$
\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{1,100}{500} = 2.2
$$
✔ Healthy liquidity – can cover short-term obligations.

Quick Ratio (Acid Test)
Excludes inventory:
$$
\text{Quick Ratio} = \frac{\text{Cash + AR}}{\text{Current Liabilities}} = \frac{200 + 500}{500} = \frac{700}{500} = 1.4
$$
✔ Good quick ratio – strong short-term solvency.

---

#### 🔹 Solvency / Leverage Ratios

Debt-to-Equity Ratio
$$
= \frac{\text{Total Debt}}{\text{Equity}} = \frac{200}{700} = 0.286
$$
✔ Low leverage – conservative capital structure.

Debt-to-Assets Ratio
$$
= \frac{\text{Total Liabilities}}{\text{Total Assets}} = \frac{700}{1,400} = 0.5
$$
✔ Half of assets are financed by debt – moderate.

---

#### 🔹 Profitability Ratios

Net Profit Margin
$$
= \frac{\text{Net Income}}{\text{Sales}} = \frac{881}{3,400} \approx 25.91\%
$$
✔ Very high profitability margin.

Return on Assets (ROA)
$$
= \frac{\text{Net Income}}{\text{Total Assets}} = \frac{881}{1,400} \approx 62.93\%
$$
⚠️ Extremely high – may suggest issues (e.g., low asset base, one-time gains, or errors).

Wait — let’s double-check:
- Net income = $881 million
- Total assets = $1,400 million → ROA = 881 / 1400 ≈ 62.9%

This seems unusually high. Typical ROA is 5–15%. Let's check if something is wrong.

But wait — net fixed assets are only $300 million, and current assets are $1,100 million. So total assets are $1,400 million — correct.

But net income is $881 million on $3,400 million sales → 25.9% margin — plausible for a service-based or high-margin business.

Still, ROA of 62.9% implies the company earns nearly 63 cents on every dollar of assets — very high.

Possible reasons:
- It might be a highly efficient firm.
- Or it could be misreported (e.g., depreciation not properly captured).
- But based on data, we proceed.

Return on Equity (ROE)
$$
= \frac{\text{Net Income}}{\text{Equity}} = \frac{881}{700} \approx 125.86\%
$$
✘ This is extremely high — over 125% ROE. Unusual unless it's a startup or has retained earnings buildup.

Let’s verify equity:
- Share capital: $200M
- Reserves & surplus: $500M
→ Total equity = $700M → correct.

Net income = $881M → so ROE = 881 / 700 ≈ 125.86%

This suggests either:
- The company is very profitable, or
- There's a data inconsistency (e.g., maybe the net income should be lower).

But let’s look at retained earnings:
Transfer to reserves = $246M
Dividends = $635M
So total net income = 246 + 635 = $881M → matches.

So numbers are consistent.

But 125% ROE means the company earned more than its equity value in one year — possible if it had low equity base and high profits.

But equity is $700M, net income $881M → yes, possible.

Alternatively, it might be a one-time gain, or small equity base due to retained earnings being reinvested.

But still — this is not sustainable long-term.

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#### 🔹 Efficiency Ratios

Inventory Turnover
$$
= \frac{\text{COGS}}{\text{Inventory}} = \frac{1,200}{400} = 3 \text{ times}
$$
→ Every 4 months, inventory is sold and replaced.

Receivables Turnover
$$
= \frac{\text{Sales}}{\text{AR}} = \frac{3,400}{500} = 6.8 \text{ times}
$$
→ ~53 days to collect receivables (365 / 6.8 ≈ 53.7 days)

Asset Turnover
$$
= \frac{\text{Sales}}{\text{Total Assets}} = \frac{3,400}{1,400} \approx 2.43
$$
→ High efficiency — generates $2.43 in sales per $1 of assets.

---

#### 🔹 Market Ratios

Market Price per Share = $7.31
Number of Shares = 200 million
→ Market Capitalization = 200 × 7.31 = $1,462 million

Book Value per Share
$$
= \frac{\text{Total Equity}}{\text{Shares}} = \frac{700}{200} = \$3.50 \text{ per share}
$$

Price-to-Book Ratio (P/B)
$$
= \frac{\text{Market Price}}{\text{Book Value}} = \frac{7.31}{3.50} \approx 2.09
$$
→ Market values the company at 2.09x book value — reasonable.

EPS (Earnings Per Share)
$$
= \frac{\text{Net Income}}{\text{Shares}} = \frac{881}{200} = \$4.405 \text{ per share}
$$

Dividend Per Share (DPS)
$$
= \frac{635}{200} = \$3.175 \text{ per share}
$$

Dividend Payout Ratio
$$
= \frac{\text{Dividends}}{\text{Net Income}} = \frac{635}{881} \approx 72.1\%
$$
→ Company pays out 72% of earnings as dividends — high payout.

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❓ Possible Task You Might Have Wanted?

Since no explicit question was given, here are likely tasks and their answers:

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✔ Task 1: Calculate Return on Equity (ROE)

Answer:
$$
\text{ROE} = \frac{881}{700} = 125.86\%
$$

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✔ Task 2: Compute Current Ratio and Quick Ratio

- Current Ratio = 1,100 / 500 = 2.2
- Quick Ratio = (200 + 500) / 500 = 1.4

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✔ Task 3: Evaluate Financial Health

Summary:
- ✔ Strong liquidity (current ratio 2.2, quick ratio 1.4)
- ✔ Low debt (debt-to-equity = 0.286)
- ⚠️ Extremely high ROE (125.86%) and ROA (62.9%) — may indicate aggressive accounting, one-time gains, or very efficient operations.
- ✔ High profit margin (25.9%)
- ✔ Efficient use of assets (asset turnover = 2.43)
- ⚠️ High dividend payout (72%) — may limit reinvestment
- ✔ Market cap ($1.46B) > Book value ($700M) → market believes in growth

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✔ Task 4: Is the Company Overvalued?

- P/B = 2.09 → not extremely high
- EPS = $4.405, Price = $7.31 → P/E = 7.31 / 4.405 ≈ 1.66
- P/E of 1.66 is very low — suggests stock is undervalued if earnings are sustainable.

But with such high ROE, investors may expect growth — but P/E is low, so perhaps undervalued.

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✔ Task 5: What is the Total Equity?

→ $700 million (from balance sheet)

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✔ Task 6: How much did the company retain?

→ $246 million transferred to reserves

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✔ Task 7: What is the Net Profit Margin?

→ 881 / 3,400 = 25.91%

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## 🟩 Final Answer Summary (if no specific task)

If your goal was to analyze the company, here’s the conclusion:

> The company shows strong profitability (25.9% net margin), excellent liquidity, and moderate leverage. However, ROE of 125.86% and ROA of 62.9% are unusually high, suggesting either exceptional efficiency or potential data anomalies. The dividend payout is high (72%), and the market price reflects confidence (P/B = 2.09). With a low P/E of 1.66, the stock may be undervalued if future earnings are sustainable.

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💡 Recommendation: Verify whether the net income or equity figures are accurate — such high returns are rare and may require further investigation.

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If you have a specific question (e.g., “What is the ROE?” or “Is the company solvent?”), please let me know and I’ll give a targeted answer!