Ratio Analysis
1. Profitability
a. Return on assets is an important ratio used to analyze and compare profitability. What are the two major components of the return on assets? Define and explain these components. Calculate and interpret these two components and show that their product equals overall ROA?
b. Which component of ROA seems like the larger driver of overall ROA for your company?
c. Pick a specific asset turnover ratio you think is most appropriate for your company. What ratio did you choose and why? Calculate and interpret this ratio for your company’s two most recent years.
2. Risk
a. Using the risk factors section of the 10-K, explain some significant risk faced by your company.
b. Explain liquidity risk. What is the purpose of the current ratio? Calculate and interpret this ratio for your company’s two most recent years.
c. Firms typically file for bankruptcy when they have insufficient cash to pay creditors’ claims. The best-known bankruptcy prediction model is Altman’s Z-score where:
z-score = 1.2 * Working capital + 1.4 * Retained earnings + 3.3 * EBIT
Total assets Total assets Total assets
+ 0.6 * Market value of equity + 1.0 * Sales
Total liabilities Total assets z-score interpretation
> 3.00 low probability of bankruptcy in the short term
2.99 – 1.81 gray area – caution advised; some exposure to
bankruptcy risk 1.80 > company in financial distress; high bankruptcy potential
d. Calculate and interpret the bankruptcy risk for your company.
