Ratios Answer
Financial Statements
Here are the financial statements for InnovateTech Solutions Inc. (all figures in thousands).
| PY2 | PY1 | CY | ||
| Assets | ||||
| Cash | 1500 | 1800 | 2200 | 2500 |
| Accounts Receivable | 3000 | 3500 | 4000 | 4200 |
| Inventory | 2500 | 2800 | 3200 | 3000 |
| Total Current Assets | 7000 | 8100 | 9400 | 9700 |
| Property,Plant, & Equipment | 10000 | 11000 | 12000 | 13000 |
| Total Assets | 17000 | 19100 | 21400 | 22700 |
| Liabilities & Equity | ||||
| Accounts Payable | 2000 | 2300 | 2500 | 2700 |
| Short Term Debt | 1000 | 1200 | 1500 | 1300 |
| Total Current Liabilities | 3000 | 3500 | 4000 | 4000 |
| Long Term Debt | 5000 | 5500 | 6000 | 6500 |
| Total Liabilities | 8000 | 9000 | 10000 | 10500 |
| Equity | ||||
| Common Stock | 4000 | 4000 | 4000 | 4000 |
| Retained Earnings | 5000 | 6100 | 7400 | 8200 |
| Total Equity | 9000 | 10100 | 11400 | 12200 |
| Total Liabilities & Equity | 17000 | 19100 | 21400 | 22700 |
| Revenue | 25000 | 28000 | 30000 |
| Cost Of Goods Sold | 15000 | 16500 | 17000 |
| Gross Profit | 10000 | 11500 | 13000 |
| Operating Expenses | 7000 | 7500 | 8000 |
| Operating Income | 3000 | 4000 | 5000 |
| Interest Expense | 500 | 600 | 700 |
| Earnings Before Tax | 2500 | 3400 | 4300 |
| Income Tax Expense | 625 | 850 | 1075 |
| Net Income | 1875 | 2550 | 3225 |
Your task is to calculate several key financial ratios for InnovateTech Solutions Inc. for the three years. These ratios will help in understanding the company's liquidity, solvency, profitability, and efficiency.
Calculate the following financial ratios for InnovateTech Solutions Inc. for the the three years:
Current Ratio
The Current Ratio measures a company's ability to pay off its short-term liabilities with its short-term assets. It is calculated as Current Assets divided by Current Liabilities.
Formula: Current Ratio = Current Assets / Current Liabilities
PY 2 Calculation:
Current Assets (2022) = $8,100
Current Liabilities (2022) = $3,500
Current Ratio (2022) = $8,100 / $3,500 = 2.31
PY 1 Calculation:
Current Assets (2023) = $9,400
Current Liabilities (2023) = $4,000
Current Ratio (2023) = $9,400 / $4,000 = 2.35
.
CY Calculation:
Current Assets (2024) = $9,700
Current Liabilities (2024) = $4,000
Current Ratio (2024) = $9,700 / $4,000 = 2.43
Debt-to-Equity
The Debt-to-Equity Ratio indicates the proportion of equity and debt used to finance a company's assets. It is calculated as Total Liabilities divided by Shareholder's Equity.
Formula: Debt-to-Equity Ratio = Total Liabilities / Shareholder's Equity
PY 2 Calculation:
Total Liabilities (2022) = $9,000
Total Equity (2022) = $10,100
Debt-to-Equity Ratio (2022) = $9,000 / $10,100 = 0.89
PY 1 Calculation:
Total Liabilities (2023) = $10,000
Total Equity (2023) = $11,400
Debt-to-Equity Ratio (2023) = $10,000 / $11,400 = 0.88
CY Calculation:
Total Liabilities (2024) = $10,500
Total Equity (2024) = $12,200
Debt-to-Equity Ratio (2024) = $10,500 / $12,200 = 0.86
Gross Profit Margin
The Gross Profit Margin indicates the percentage of revenue left after deducting the cost of goods sold. It is calculated as Gross Profit divided by Revenue.
Formula: Gross Profit Margin = Gross Profit / Revenue
PY 2 Calculation:
Gross Profit (2022) = $10,000
Revenue (2022) = $25,000
Gross Profit Margin (2022) = $10,000 / $25,000 = 0.40 or 40.0%
PY 1 Calculation:
Gross Profit (2023) = $11,500
Revenue (2023) = $28,000
Gross Profit Margin (2023) = $11,500 / $28,000 = 0.4107 or 41.1%
CY Calculation:
Gross Profit (2024) = $13,000
Revenue (2024) = $30,000
Gross Profit Margin (2024) = $13,000 / $30,000 = 0.4333 or 43.3%
Net Profit Margin
The Net Profit Margin represents the percentage of revenue that translates into net income after all expenses, including taxes and interest, have been deducted. It is calculated as Net Income divided by Revenue.
Formula: Net Profit Margin = Net Income / Revenue
PY 2 Calculation:
Net Income (2022) = $1,875
Revenue (2022) = $25,000
Net Profit Margin (2022) = $1,875 / $25,000 = 0.075 or 7.5%
PY 1 Calculation:
Net Income (2023) = $2,550
Revenue (2023) = $28,000
Net Profit Margin (2023) = $2,550 / $28,000 = 0.0911 or 9.1%
CY Calculation:
Net Income (2024) = $3,225
Revenue (2024) = $30,000
Net Profit Margin (2024) = $3,225 / $30,000 = 0.1075 or 10.8%
Return on Assets
Return on Assets (ROA) indicates how efficiently a company is using its assets to generate earnings. It is calculated as Net Income divided by Average Total Assets. Average Total Assets are calculated as (Beginning Total Assets + Ending Total Assets) / 2.
Formula: ROA = Net Income / Average Total Assets
PY 2 Calculation:
Net Income (2022) = $1,875
Average Total Assets (2022) = (Total Assets 2021 + Total Assets 2022) / 2 = ($17,000 + $19,100) / 2 = $18,050
ROA (2022) = $1,875 / $18,050 = 0.1039 or 10.4%
PY 1 Calculation:
Net Income (2023) = $2,550
Average Total Assets (2023) = (Total Assets 2022 + Total Assets 2023) / 2 = ($19,100 + $21,400) / 2 = $20,250
ROA (2023) = $2,550 / $20,250 = 0.1259 or 12.6%
CY Calculation:
Net Income (2024) = $3,225
Average Total Assets (2024) = (Total Assets 2023 + Total Assets 2024) / 2 = ($21,400 + $22,700) / 2 = $22,050
ROA (2024) = $3,225 / $22,050 = 0.1463 or 14.6%
Inventory Turnover
Formula: Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory Turnover measures how many times a company's inventory is sold and replaced over a period. It is calculated as Cost of Goods Sold (COGS) divided by Average Inventory.[5] Average Inventory is calculated as (Beginning Inventory + Ending Inventory) / 2.
PY 2 Calculation:
COGS (2022) = $15,000
Average Inventory (2022) = (Inventory 2021 + Inventory 2022) / 2 = ($2,500 + $2,800) / 2 = $2,650
Inventory Turnover (2022) = $15,000 / $2,650 = 5.66 times
PY 1 Calculation:
COGS (2023) = $16,500
Average Inventory (2023) = (Inventory 2022 + Inventory 2023) / 2 = ($2,800 + $3,200) / 2 = $3,000
Inventory Turnover (2023) = $16,500 / $3,000 = 5.50 times
CY Calculation:
COGS (2024) = $17,000
Average Inventory (2024) = (Inventory 2023 + Inventory 2024) / 2 = ($3,200 + $3,000) / 2 = $3,100
Inventory Turnover (2024) = $17,000 / $3,100 = 5.48 times