Sample Essay

Liquidity Ratios (Measuring the ability to pay current liabilities):

  1. Current Ratio: (Current Assets/ Current Liabilities) 3457/6072 = 0.57
  2. Acid Test Quick Ratio: (Current Assets –[stock in trade-trade deposits and short term prepayments]/Current Liabilities) 3457- (1309-48)/6072= 0.37
  3. Cash Ratio: (Cash + Marketable Securities/ Current Liabilities) 800/6072= 0.14

Activity / Turnover / Efficiency /Performance Ratio/Assets Management Ratios (Measuring the ability to sell inventory and collect receivables):

  1. Inventory Turnover: (Cost of goods sold/Average Inventory) 31271/1309= 23.89
  2. Accounts Receivables Turnover: (Net Credit Sales/Average Accounts Receivables) 37001/1002= 36.93
  3. Average Collection Period: (365/Accounts Receivables Turnover) 365/33.85= 10.79
  4. Asset Turnover: (Sales/Total Assets) 37001/20410= 1.82
  5. Fixed Assets Turnover: (Sales/Fixed Assets)= 37001/16953= 2.19

Debt Management Ratios (Measuring the ability to pay long term debts or leverage ratios):

  1. Debt to Equity Ratio: (Total Debt/Total Equity)= 4988/9006= 0.56
  2. Debt to Asset Ratio: (Total Debt/Total Assets)= 4988/20410= 0.25
  3. Fixed Charges Coverage Ratio: (EBIT+Depreciation/Interest+[repayment of loan/1-tax rate) 1957+654/51+0.70 = 50.51
  4. Times Interest Earned Ratio: (EBIT+Depreciation/Interest) 1957+654/51= 51.20

Profitability Ratios (Measuring Profitability of the business):

  1. Gross Profit Ratio: (Gross Profit/Sales x 100) 2703/37001 x 100= 8%
  2. Operating Margin: (Operating Profit/Sales x 100) 1957/37001 x 100= 6%
  3. Rate of Return on Total Assets: (Net Income/Average Total Assets) 1366/20410= 0.07%
  4. Rate of Return on Equity: (Net Income less Preferred Dividends/ Average Equity) 1366/9006= 0.16%
  5. Rate of Return on Capital Employed: (Net Income/Average Total Assets- Current Liabilities) 1366/20410-6072= 0.10%
  6. Earning Power Ratio: (EBIT/Average Total Assets) 1366/20410= 0.07%

Market Ratios (Analyzing stock as an investment):

  1. Price/Earnings Ratio: (Market price per share/Earnings Per Share) 19.61/17.72= 1.11
  2. Dividend Yield: (Dividend per share/ Market price per share) 7.56/19.61= 0.39
  3. Book Value per share: (Equity/No. of shares outstanding) 9006/9057= 1.00
  4. Market Value per share: (Market value per share/book value per share) 19.61/1.00= 19.61

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Essay: Ratio Analysis of Tesco Plc for the year 2005
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