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1805 Words Dec 1st, 2012 8 Pages
Juan Ibarra 2/13/07 Professor Anu Vuorikoski Bus 173A - Intermediate Financial Management Chapter 8: mini case

a. Why are ratios useful? What are the five major categories of ratios?

Ratios are useful to evaluate a firm’s financial statements and one can also compare their performance with other firms, or the industry average.

The five major categories for ratios are as follow: i. Liquidity Ratios: measures the liquidity of the firm’s current assets to their current liabilities (or obligations to creditors). ii. Asset Management Ratios: measures how effectively the firm is handling and managing their assets. iii. Debt Management Ratios: measure their debt
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Meaning, they are being a bit more efficient than the industry average in using their assets to generate sales.

Total Assets Turnover = Sales / Total Assets Turnover Total Assets Turnover = $7,035,600 / $3,516,952 Total Assets Turnover = 2.00 times

The industry total asset turnover is 2.5 times while the firm’s is expected to be a 2.0 times. The firm is below the industry average due the increase in inventories and accounts receivables.

d. Calculate the 2007 debt, times-interest-earned, and EBITDA coverage ratios. How does Computron compare with the industry with respect to financial leverage? What can you conclude from these ratios?

Debt Ratio = total liabilities / total assets Debt Ratio = $ 1,539,800/ $3,516,952 Debt Ratio = 0.44 = 44% The industry average is 50%, which means creditors have supplied 50% (half) of their financing. The firm’s debt ratio is lower than the industry average, 44%, which is a good sign. They should try to minimize it a bit more or not let it increase.

Times-Interest-Earned (TIE) = EBIT / Interest Charges TIE = $502,640/ $80,000 TIE = 6.28 times

The industry and the firm’s TIE are almost the same (firm’s is 6.28 and the industry average is 6.2). They are both covering interest charges on their debt in the same length of time.

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