Basket Wonders’ Balance

Sheet (in millions) Dec 31, 2020

ASSETS LIABILITIES & EQUITY
Cash and C.E. P 90 Notes Payable P 290
Acct. Rec. 394 Acct. Payable 94
Inventories 691 Accrued Taxes 16
Marketable securities 15 Other Accrued Liab. 100
Prepaid expense 5 Current Liab. P 500
Current Assets 1,195 Long-Term Debt 530
Property & Equip 1030 Shareholders’ Equity
Less: Accu. Deprn. (329) Ordinary shares(P1 par) 200
Net Prop & Equip 701 Share premium 729
Investment, LT 50 Retained Earnings 210
Other Assets, LT 223 Total Equity P1,139
6-1 Total Assets P2,169 Total Liab&Equity P2,169
 Basket Wonders’
Income Statement
Basket Wonders Statement of Earnings (in millions) for
Year Ending December 31, 2020a

Net Sales P 2,211 a. Measures profitability

Cost of Goods Sold b 1,599 over a time period.
Gross Profit P 612 b. Received, or receivable,
SG&A Expenses c 402 from customers.
EBITd P 210 c. Sales comm., adv.,
Interest Expensee 59 officers’ salaries, etc.
Net Income b-4 tax f P 151 d. Operating income.
Income Taxes 60 e. Cost of borrowed funds.
Net income g P 91 f. Taxable income.
g. Amount earned for
6-2 shareholders.
 Liquidity Ratios
Balance Sheet Ratios Current ratio

Current Assets
Liquidity Ratios Current Liabilities

Shows a firm’s
ability to cover its
current liabilities
P 1,195 = 2.39: 1
with its current P 500
6-3
assets.
 Liquidity Ratio
Comparisons
Current Ratio
Year BW Industry
2020 2.39 2.15
2019 2.26 2.09
2018 1.91 2.01
Ratio is stronger than the industry average.
6-4
 Liquidity Ratios
Balance Sheet Ratios Acid-Test (Quick) ratio

CA – Inv - Pre Exp

Liquidity Ratios Current Liabilities

Shows a firm’s
ability to meet
current liabilities P1,195 - P691 – P5
with its most liquid P500 = 1.00: 1

6-5
assets.
 Liquidity Ratio
Comparisons
Acid-Test Ratio
Year BW Industry
2020 1.00 1.25
2019 1.04 1.23
2018 1.11 1.25
Ratio is weaker than the industry average.
6-6
 Summary of the Liquidity
Ratio Comparisons
Ratio BW Industry
Current 2.39 2.15
Acid-Test 1.00 1.25

Strong current ratio and weak acid-test

ratio indicates a potential problem in the
inventories account.

6-7
 Time Line Representation of the
Activities Cycle

6-8
 Activity Ratios
Income Statement / Receivable Turnover
(Assume all sales are credit sales.)
Balance Sheet
Ratios Annual Net Credit Sales
Ave. Receivables
(A/R, beg + A/R, end) /2
Activity Ratios

Indicates quality of
receivables and how
successful the firm is in P 2,211 = 5.61 times
its collections. P 394
6-9
 Activity Ratios
Income Statement / Age of Receivables
Balance Sheet
Days in the Year
Ratios
Receivable Turnover

Activity Ratios - very useful when we relate it to

terms of transaction, i.e. 5/30,n/60

Average number of days

that receivables are
outstanding. 365 = 65.06 days
(or RT in days) 5.61
6-10
 Activity
Ratio Comparisons
Average Collection Period
Year BW Industry
2020 65.06 65.7
2019 71.1 66.3
2018 83.6 69.2
BW has improved the average collection
6-11
period to that of the industry average.
 Activity Ratios
Income Statement / Payable Turnover (PT)
(Assume annual credit
Balance Sheet purchases = P 1,551.)
Ratios
Annual Credit Purchases
Ave. Accounts Payable
Activity Ratios

Indicates the
promptness of payment
to suppliers by the firm. P 1551
= 16.5 times
P 94
6-12
 Activity Ratios
Income Statement / Age of Payables
Balance Sheet
Ratios Days in the Year
Payable Turnover
Activity Ratios

Average number of days

that payables are 365
outstanding. = 22.12 days
16.5
6-13
(or PT in days)
 Activity
Ratio Comparisons
Payable Turnover in Days
Year BW Industry
2020 22.12 46.7
2019 25.4 51.1
2018 43.5 48.5
BW has improved the PT in Days.
6-14
Is this good?
 Activity Ratios
Income Statement / Inventory Turnover
Balance Sheet
Ratios Cost of Goods Sold
Ave. Inventory
Activity Ratios

Indicates the
effectiveness of the P 1,599 = 2.31 times
inventory management P 691
6-15
practices of the firm.
 Activity
Ratio Comparisons
Inventory Turnover Ratio
Year BW Industry
2020 2.31 3.45
2019 2.44 3.76
2018 2.64 3.69
BW has a very poor inventory turnover ratio.
6-16
 Activity Ratios
Income Statement / Age of Inventory
Balance Sheet
Ratios Days in the Year
Inventory Turnover
Activity Ratios

Average number of days

that inventory are 365
outstanding. = 158 days
2.31
6-17
 Solvency Ratios
Balance Sheet Ratios Debt ratio

Total Liabilities
Solvency Ratio Total Assets

Shows a firm’s
capital provided by
creditors. The
P1,030 = 47.49%
greater the ratio, the P2,169
6-18
higher is the risk.
 Solvency Ratios
Balance Sheet Ratios Equity ratio

Total Equities
Solvency Ratio Total Assets

Shows a firm’s
capital provided by
shareholders.
P1,139 = 52.51%
P2,169
6-19
 Solvency Ratios
Balance Sheet Ratios Debt to Equity ratio

Total Liabilities
Solvency Ratio Total Equities

Shows a firm’s
financial leverage. The
higher the ratio, the
P1,030 = 90.43%
greater the use of debt, P1,139
6-20
the greater the risk.
 Solvency Ratios
Income Statement Times Interest Earned
Ratios Ratio

Operating Income
Interest Expense
Solvency Ratios

Measure the extent to which

a company’s financing
P210 = 3.56 times
charges are covered by
P59
operating income
6-21
 Profitability Ratios
Income Statement Gross Profit Margin
Ratios
Gross Profit
Net Sales
Profitability Ratios

Indicates the efficiency

of operations and firm P612 = 27.68%
pricing policies. P2,211
6-22
 Profitability Ratios
Return on Sales
Income Statement
Net Profit after Taxes
Net Sales
Profitability Ratios

Indicates the firm’s

profitability after taking P91 = 4.12%
account of all expenses P2,211
6-23
and income taxes.
 Profitability Ratios

Income Statement / Return on Assets

Balance Sheet
Ratios Net Profit b4 int & Taxes
Ave. Total Assets
Profitability Ratios
- measures the stewardship of the
firm’s management.
Indicates the
profitability on the
assets of the firm (after P210 = 9.72%
all expenses but before P2,160
6-24 interest and taxes).
 Profitability Ratios

Income Statement / Return on Equity

Balance Sheet
Ratios Net Profit
Ave. Equities
Profitability Ratios

Measures the rate of

return on the
investment of ordinary P91 = 7.99%
shareholder P1,139
6-25
 Profitability Ratios

Income Statement / Earning per Share

Balance Sheet
Ratios Net Profit
Weighted Ave. of OSC
Profitability Ratios

It indicates the amount

of earning for every
share of stock P91 = .46
200
6-26
 Profitability Ratios

Other Financial Pay-out Ratio

Data
Dividend per Share
EPS
Let’s assume that the listed price of stock
Valuation Ratios was P1.5 per share and the dividend was P.12
per share.
Shows the allocation of
cash dividend in relation
to earning per share P.12 = 26.09%
P.46
6-27
 Profitability Ratios

Other Financial Price-Earning Ratio

Data
MV per Share
EPS
Valuation Ratios Let’s assume that the listed price of
stock was P1.5 per share and the
Shows the market dividend was P.12 per share.
price/value of share of
stock for every peso of P1.5 = P3.26
profit/earning. P.46
6-28
 Profitability Ratios

Other Financial Dividend Yield

Data
Dividend per Share
MV per Share
Valuation Ratios Let’s assume that the listed price of
stock is P1.5 per share and the
Shows the cash return dividend was P.12 per share.
for every share of
investment. P.12 = 8%
P1.5
6-29