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Analysis and Interpretation of Financial Statements 1

The document analyzes financial statements focusing on profitability, liquidity, and solvency ratios. It discusses key metrics such as Gross Profit Margin, Profit Margin, Return on Total Assets, and Return on Equity, which reflect a firm's ability to generate income and manage expenses. Additionally, it covers liquidity through working capital and solvency using equity and debt ratios, highlighting the company's long-term financial health.

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5 views7 pages

Analysis and Interpretation of Financial Statements 1

The document analyzes financial statements focusing on profitability, liquidity, and solvency ratios. It discusses key metrics such as Gross Profit Margin, Profit Margin, Return on Total Assets, and Return on Equity, which reflect a firm's ability to generate income and manage expenses. Additionally, it covers liquidity through working capital and solvency using equity and debt ratios, highlighting the company's long-term financial health.

Uploaded by

repizoairra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Analysis and Interpretation of

Financial Statements 1
1.Profitability Ratios

The profitability ratios measure the firms ability to earn


profits. return on investments is a primary concern for many
stakeholders, especially investors.
a. Profitability ratios measure the ability of the company to generate income
from the use of its assets and invested capital as well as control its cost.

Gross Profit Margin – Gross Profit Ex. 45,000/P110,000=0.45 (this


Net Sales means that for every P1 of sales
or revenue 0.45 is left after the
firm has paid for the cost of
goods.) the higher the gross
profit margin the better.
b. Profit Margin

Profit Margin = Net Income = P24.88 = 22.6%


Net Sales P110

 this represents what the firm earned from the revenues. The
profit margin is a reflection of how well the firm managed its
expenses in relation to sales and the efficiency of its operations.
c. Return on Total Assets
Return on Total Assets = Net Income = P24.88 = P0.12
Average Total Assets P212.5

d. Return on Equity
Return on Equity = Net Income = P 24.88 = P0.13
Average Owner’s Equity 185

Average Owner’s Equity = P90,000 +P80,000 = P185,000


2. Liquidity Ratio
Liquidity is the ability of the business to efficiently manage
working capital and ensure that there are adequate current assets to
cover for the current obligations as they fall due.

Working capital: Current Assets – Current liabilities

2012 2011
245,000/50,000=P195,000 P240,000-60,000 =P180,000
3. Solvency
– (long-term liquidity) ability of the business to survive or withstand pressure over
a long period of time.

Equity Ratio:
Owners Equity / Total Assets
200,000/445,000 x 100 =45% 140,000/420,000 x 100= 33%
Debt Ratio :
Total Liabilities/Total Assets
245,000/445,000 x 100 = 55% 280,000/420,000 x 100 = 67%
Times Interest Earned:
Operating Income/Interest Expense
141,840/45,000 =2.15 times 103,800/38,750 = 2.67 times

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