Business Financial Analysis
Transcript of Business Financial Analysis
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Business Financial Analysis
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Business Financing and Planning
Financial Ratio Analysis
Enter the cells with a yellow highlight
1) The year & year name for the left and right column years.
2) The requested data for the Balance Sheet for both years.
3) The requested data for the Income Statement for both years.4) The other requested data.
Company Name: Company Name
Year Year NameRight column year: 2007 Current Year
Left column year: 2006 Previous Year
(Please note that the majority of the financial analysis is performed on the left column year.)
Company Name
Comparative Balance Sheets
Assets 2006 2007
Previous Year Current Year
Cash $95,000 $90,000Short-term securities $55,000 $62,000Accounts receivable $120,000 $150,000Inventory $90,000 $100,000Prepaid expenses $37,000 $35,000
Current Assets $397,000 $437,000Gross: Plant & Equipment $629,000 $650,000Less: Accum. depreciation $118,000 $135,000
Net plant & equipment $511,000 $515,000Other tangible assets $4,000 $5,000
Intangible assets $3,000 $3,000Total Assets $915,000 $960,000
Liabilities & Equity
Short-term notes payable $22,000 $25,000Curr. maturities, l.t. debt $25,000 $30,000Accounts payable $270,000 $285,000Accrued expenses $33,000 $33,000Taxes payable $1,200 $2,000Other curr. liabilities $35,000 $33,000
Current Liabilites $386,200 $408,000Long-term debt $187,000 $162,000Less: curr. maturities $25,000 $30,000
Net long-term debt $162,000 $132,000Preferred stock $100,000 $100,000
$50,000 $50,000Capital surplus $12,800 $20,000Retained earnings $204,000 $250,000
$915,000 $960,000
Comparative Income Statements
Net Sales $3,550,000 $3,700,000Cost of goods sold $3,050,000 $3,100,000
Common stock (@ par value)
Total Liabilities &Stockholders' Equity
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Gross profit $500,000 $600,000General, selling & admin. $277,000 $285,000Operating profit $223,000 $315,000Interest expense $5,500 $6,000Other income (expense) $400 $500Pretax income $217,900 $309,500Income taxes $65,000 $75,000Net income $152,900 $234,500
Other Requested Data:
Common stock valued at an earnings multiple of:(Price earnings multiple or P/E ratio) 12Common stock dividends paid per share in current yr: $2.00Par value per share of common stock: $1.00Percent return on preferred stock: 10.0%Par value per share of prefered stock: $10.00
Preferred stock is convertible into how manyshares of common stock: 10Intangible net worth: $10,000Depreciation in right column year was: $75,000Depreciation in left column year was: $100,000Purchases are what percent of cost of sales: 66.7%Credit sales are what percent of total sales: 100.0%
Company Name
Summary of Financial Ratio Analysis 2007
1. Liquidity Ratios
Net Working Capital: $29,000
Net Working Capital to Sales: 0.01Net Working Capital to Total Assets: 0.03Current Ratio: 1.07Quick Assets: $302,000
Net Quick Assets: -$106,000Net Quick Ratio: 0.74Cash Ratio: 0.37
Basic Defense Interval: 32.6
2. Leverage and Capital Structure Ratios
Tangible equity $410,000Long-term debt to tangible equity ratio: 0.40Total debt to equity ratio: 1.29Total debt to assets (debt to capital) ratio: 0.56
Fixed assets to equity ratio: 1.23
Current liabilities to equity ratio: 0.97Overtrading ratio 0.98
3. Profitability & Values Ratios
Net profit margin (return on sales): 6.3%Rate of return on investment (ROI): 42.5%Rate of return on assets (ROA): 24.4%
Rate of return on equity (ROE): 55.8%Rate of return on common stockholders equity: 70.2%
Gross profit margin: 16.2%Operating margin: 8.5%Operating ratio: 0.91Asset turnover: 3.9Earning power on assets: 33.1%Book value: $6.40
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Earnings per share (common stock): $4.49Cash flow per share (common stock): $6.69Market value per share (common stock): $53.88Capitalization rate: 8.3%Yield: 3.71%Payout ratio (common stock): 44.5%Dilution percent: 66.7%Diluted earnings per share: $1.56
4. Turnover & Activity Ratios
Accounts payable days purchases outstanding: 50.3Accounts receivable aver. collection period: 13.3Inventory turnover: 32.6Average days for inventory to sell: 11.2Asset turnover: 3.9Gross margin return on inventory: 3.26
5. Coverage Ratios
Cash flow times interest earned ratio: 50.9Times interest earned ratio: 52.6Cash flow to current maturities ratio: 10.0
6. Source and Application of Funds
The source and application of funds schedule reconciles the balance sheet and income statement. It reflects wherecapital came from (internal and external sources) and how it was used. The type of activity from the Statementof Cash Flows is shown in parentheses.
Sources of Capital:Net Income (operating) $234,500Depreciation (operating) $100,000Long-term debt (financing) $132,000
Total Sources $466,500
Uses of Cash:Capital expenditures (investing) $21,000
Cash dividends (financing):Preferred stock $10,000Common stock $100,000
Increase in working cap. (operating) $18,200
Total Uses $149,200
Reconciliation of Net Income to Net Cash Provided (Used) by Operating Activities
Net Income $234,500Adjustments to reconcile net income to netcash provided by operating activities:
Depreciation $100,000Other $0
(Increase) decrease in assets and increase(decrease) in liabilties:
Cash $5,000Short-term securities ($7,000)Accounts receivable ($30,000)Inventory ($10,000)Prepaid expenses $2,000Notes payable $3,000Accounts payable $15,000Curr. maturities long-term debt $5,000Accrued expenses $0Taxes payable $800Other curr. liab. ($2,000)
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Net Cash Provided (Used) byOperating Actvities $316,300
Changes in Working Capital:
Increase (decrease) in cash ($5,000)Increase (decrease) in short-term securities $7,000Increase (decrease) in accounts receivable $30,000
Increase (decrease) in inventory $10,000Increase (decrease) in prepaid expenses ($2,000)Decrease (increase) in notes payable ($3,000)Decrease (increase) in accounts payable ($15,000)Decrease (increase) in curr. maturities
long-term debt ($5,000)Decrease (increase) in accrued expenses $0Decrease (increase) in taxes payable ($800)Decrease (increase) in other curr. liab. $2,000
Net change in working capital $18,200
7. Z-Score Analysis to Predict Bankrupcy
Ratio Answer Coeff. Z-Score
2007
Working capital = 0.030 x 1.20 0.036/ Total assets
Retained earnings = 0.260 x 1.40 0.365/ Total assets
Earnings before interest = 0.329 x 3.30 1.085& tax / Total assets
Net worth = 0.778 x 0.60 0.467/ Total liabilities
Net Sales = 3.854 x 1.00 3.854/ Total assets
Total Z-Score = 5.806
2006
Working capital = 0.012 x 1.20 0.077/ Total assets
Retained earnings = 0.223 x 1.40 0.727/ Total assets
Earnings before int. = 0.244 x 3.30 1.641& tax / Total assets
Net worth = 0.669 x 0.60 0.703/ Total liabilities
Net Sales = 3.880 x 1.00 3.880/ Total assets
Total Z-Score = 7.027
Key: >= 3.00 Safe from Bankruptcy
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1.81 to 2.99 Danger area
Company Name
Detailed Financial Ratio Analysis 2007
1. Liquidity Ratios
Net Working Capital = Current Assets - Current liabilities$29,000 = $437,000 - $408,000
Net Working Capital to Sales = Net working capital / Net Sales0.01 = $29,000 / $3,700,000
Net Working Capital to Total Assets:= Net working capital / Total assets
0.03 = $29,000 / $960,000
Current Ratio = Current Assets / Current liabilities1.07 = $437,000 / $408,000
Quick Assets = Cash + Short-term securities + Accounts Receivable$302,000 = $152,000 + $150,000
Net Quick Assets = Quick assets - Current liabilities-$106,000 = $302,000 - $408,000
Net Quick Ratio = Quick assets / Current liabilities0.74 = $302,000 / $408,000
Cash Ratio = Cash + Short-term securities / Current liabilities0.37 = $152,000 / $408,000
Basic Defense Interval = Cash + Short-term securities + Accounts Receivable / Daily Expenses32.6 = $302,000 / $9,274
Percentage composition of current assets:
Cash $90,000 21%Short-term securities $62,000 14%Accounts receivable $150,000 34%Inventory $100,000 23%Prepaid expenses $35,000 8%
Current Assets $437,000 100%
2. Leverage and Capital Structure Ratios
Tangible equity = Total equity - intangible net worth$410,000 = $420,000 - $10,000
Long-term debt to tangible equity ratio:= Long-term debt / Tangible equity
0.40 = $132,000 / $410,000
Total debt to equity ratio = Current liabilities + Long-term debt / Total net worth1.29 = $540,000 / $420,000
Total debt to assets ratio (or debt to capital ratio):= Current liabilities + Long-term debt / Total assets= Current liabilities + Long-term debt / cur. liab. + l.t. debt + Net worth
0.56 = $540,000 / $960,000
Fixed assets to equity ratio = Fixed assets / Total net worth1.23 = $515,000 / $420,000
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Current liabilities to equity ratio:= Current liabilities / Total net worth
0.97 = $408,000 / $420,000
Overtrading ratio = Current Liabilities / Net worth - Intangible assets
0.98 = $408,000 /$420,000 - $3,000
Capitalization - all long-term capital
Net long-term debt $132,000 24%Preferred stock $100,000 18%Capital surplus $20,000 4%Common stock $50,000 9%Retained earnings $250,000 45%Common stockholders'
equity $320,000 58%Long-term Capital $552,000 100%
3. Profitability & Values Ratios
Net profit margin (return on sales):= Net income / Net Sales
6.3% = $234,500 / $3,700,000
Rate of return on capitalization (return on investment, ROI):= Net income / Total capitalization
42.5% = $234,500 / $552,000
Rate of return on assets (ROA):
= Net income / Total assets24.4% = $234,500 / $960,000
Rate of return on equity (ROE):= Net income / Total net worth
55.8% = $234,500 / $420,000
Rate of return on common stockholders' equity:= Net income - Preferred dividend / Common stockholders' equity
70.2% = $224,500 / $320,000
Gross profit margin = Gross profit / Net Sales
16.2% = $600,000 / $3,700,000
Operating margin = Operating profit / Net Sales8.5% = $315,000 / $3,700,000
Operating ratio = Cost of goods sold + General, selling & admin. / Net Sales0.91 = $3,100,000 + $285,000 / $3,700,000
Asset turnover = Net Sales / Operating Assets3.9 = $3,700,000 / $952,000
Earning power on assets = Operating margin x Asset turnover
33.1% = 8.5% x 3.89
Book value = Common stockholders' equity / number of shares outstanding$6.40 = $320,000 / 50,000
Note: Compute shares outstanding by dividing common stock (@ par value) on balance sheetby par value per share. Par value is simply a stated value of common stockfor accounting and legal purposes.
Earnings per share = Net income - Preferred dividend /(common stock) Number of shares outstanding
$4.49 = $234,500 - $10,000 / 50,000
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Business Financial Analysis SCR
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Business Financing and Planning
Financial Ratio Analysis
Enter the cells with a yellow highlight
1) The year & year name for the left and right column years.
2) The requested data for the Balance Sheet for both years.
3) The requested data for the Income Statement for both years.4) The other requested data.
Company Name: Company Name
Year Year NameRight column year: 2007 Current Year
Left column year: 2006 Previous Year
(Please note that the majority of the financial analysis is performed on the left column year.)
Company Name
Comparative Balance Sheets
Assets 2006 2007
Previous Year Current Year
Cash $95,000 $90,000Short-term securities $55,000 $62,000Accounts receivable $120,000 $150,000Inventory $90,000 $100,000Prepaid expenses $37,000 $35,000
Current Assets $397,000 $437,000Gross: Plant & Equipment $629,000 $650,000Less: Accum. depreciation $118,000 $135,000
Net plant & equipment $511,000 $515,000Other tangible assets $4,000 $5,000
Intangible assets $3,000 $3,000Total Assets $915,000 $960,000
Liabilities & Equity
Short-term notes payable $22,000 $25,000Curr. maturities, l.t. debt $25,000 $30,000Accounts payable $270,000 $285,000Accrued expenses $33,000 $33,000Taxes payable $1,200 $2,000Other curr. liabilities $35,000 $33,000
Current Liabilites $386,200 $408,000Long-term debt $187,000 $162,000Less: curr. maturities $25,000 $30,000
Net long-term debt $162,000 $132,000Preferred stock $100,000 $100,000
$50,000 $50,000Capital surplus $12,800 $20,000Retained earnings $204,000 $250,000
$915,000 $960,000
Comparative Income Statements
Net Sales $3,550,000 $3,700,000Cost of goods sold $3,050,000 $3,100,000
Common stock (@ par value)
Total Liabilities &Stockholders' Equity
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Gross profit $500,000 $600,000General, selling & admin. $277,000 $285,000Operating profit $223,000 $315,000Interest expense $5,500 $6,000Other income (expense) $400 $500Pretax income $217,900 $309,500Income taxes $65,000 $75,000Net income $152,900 $234,500
Other Requested Data:
Common stock valued at an earnings multiple of:(Price earnings multiple or P/E ratio) 12Common stock dividends paid per share in current yr: $2.00Par value per share of common stock: $1.00Percent return on preferred stock: 10.0%Par value per share of prefered stock: $10.00
Preferred stock is convertible into how manyshares of common stock: 10Intangible net worth: $10,000Depreciation in right column year was: $75,000Depreciation in left column year was: $100,000Purchases are what percent of cost of sales: 66.7%Credit sales are what percent of total sales: 100.0%
Company Name
Summary of Financial Ratio Analysis 2007
1. Liquidity Ratios
Net Working Capital: $29,000
Net Working Capital to Sales: 0.01Net Working Capital to Total Assets: 0.03Current Ratio: 1.07Quick Assets: $302,000
Net Quick Assets: -$106,000Net Quick Ratio: 0.74Cash Ratio: 0.37
Basic Defense Interval: 32.6
2. Leverage and Capital Structure Ratios
Tangible equity $410,000Long-term debt to tangible equity ratio: 0.40Total debt to equity ratio: 1.29Total debt to assets (debt to capital) ratio: 0.56
Fixed assets to equity ratio: 1.23
Current liabilities to equity ratio: 0.97Overtrading ratio 0.98
3. Profitability & Values Ratios
Net profit margin (return on sales): 6.3%Rate of return on investment (ROI): 42.5%Rate of return on assets (ROA): 24.4%
Rate of return on equity (ROE): 55.8%Rate of return on common stockholders equity: 70.2%
Gross profit margin: 16.2%Operating margin: 8.5%Operating ratio: 0.91Asset turnover: 3.9Earning power on assets: 33.1%Book value: $6.40
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Earnings per share (common stock): $4.49Cash flow per share (common stock): $6.69Market value per share (common stock): $53.88Capitalization rate: 8.3%Yield: 3.71%Payout ratio (common stock): 44.5%Dilution percent: 66.7%Diluted earnings per share: $1.56
4. Turnover & Activity Ratios
Accounts payable days purchases outstanding: 50.3Accounts receivable aver. collection period: 13.3Inventory turnover: 32.6Average days for inventory to sell: 11.2Asset turnover: 3.9Gross margin return on inventory: 3.26
5. Coverage Ratios
Cash flow times interest earned ratio: 50.9Times interest earned ratio: 52.6Cash flow to current maturities ratio: 10.0
6. Source and Application of Funds
The source and application of funds schedule reconciles the balance sheet and income statement. It reflects wherecapital came from (internal and external sources) and how it was used. The type of activity from the Statementof Cash Flows is shown in parentheses.
Sources of Capital:Net Income (operating) $234,500Depreciation (operating) $100,000Long-term debt (financing) $132,000
Total Sources $466,500
Uses of Cash:Capital expenditures (investing) $21,000
Cash dividends (financing):Preferred stock $10,000Common stock $100,000
Increase in working cap. (operating) $18,200
Total Uses $149,200
Reconciliation of Net Income to Net Cash Provided (Used) by Operating Activities
Net Income $234,500Adjustments to reconcile net income to netcash provided by operating activities:
Depreciation $100,000Other $0
(Increase) decrease in assets and increase(decrease) in liabilties:
Cash $5,000Short-term securities ($7,000)Accounts receivable ($30,000)Inventory ($10,000)Prepaid expenses $2,000Notes payable $3,000Accounts payable $15,000Curr. maturities long-term debt $5,000Accrued expenses $0Taxes payable $800Other curr. liab. ($2,000)
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Net Cash Provided (Used) byOperating Actvities $316,300
Changes in Working Capital:
Increase (decrease) in cash ($5,000)Increase (decrease) in short-term securities $7,000Increase (decrease) in accounts receivable $30,000
Increase (decrease) in inventory $10,000Increase (decrease) in prepaid expenses ($2,000)Decrease (increase) in notes payable ($3,000)Decrease (increase) in accounts payable ($15,000)Decrease (increase) in curr. maturities
long-term debt ($5,000)Decrease (increase) in accrued expenses $0Decrease (increase) in taxes payable ($800)Decrease (increase) in other curr. liab. $2,000
Net change in working capital $18,200
7. Z-Score Analysis to Predict Bankrupcy
Ratio Answer Coeff. Z-Score
2007
Working capital = 0.030 x 1.20 0.036/ Total assets
Retained earnings = 0.260 x 1.40 0.365/ Total assets
Earnings before interest = 0.329 x 3.30 1.085& tax / Total assets
Net worth = 0.778 x 0.60 0.467/ Total liabilities
Net Sales = 3.854 x 1.00 3.854/ Total assets
Total Z-Score = 5.806
2006
Working capital = 0.012 x 1.20 0.077/ Total assets
Retained earnings = 0.223 x 1.40 0.727/ Total assets
Earnings before int. = 0.244 x 3.30 1.641& tax / Total assets
Net worth = 0.669 x 0.60 0.703/ Total liabilities
Net Sales = 3.880 x 1.00 3.880/ Total assets
Total Z-Score = 7.027
Key: >= 3.00 Safe from Bankruptcy
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1.81 to 2.99 Danger area
Company Name
Detailed Financial Ratio Analysis 2007
1. Liquidity Ratios
Net Working Capital = Current Assets - Current liabilities$29,000 = $437,000 - $408,000
Net Working Capital to Sales = Net working capital / Net Sales0.01 = $29,000 / $3,700,000
Net Working Capital to Total Assets:= Net working capital / Total assets
0.03 = $29,000 / $960,000
Current Ratio = Current Assets / Current liabilities1.07 = $437,000 / $408,000
Quick Assets = Cash + Short-term securities + Accounts Receivable$302,000 = $152,000 + $150,000
Net Quick Assets = Quick assets - Current liabilities-$106,000 = $302,000 - $408,000
Net Quick Ratio = Quick assets / Current liabilities0.74 = $302,000 / $408,000
Cash Ratio = Cash + Short-term securities / Current liabilities0.37 = $152,000 / $408,000
Basic Defense Interval = Cash + Short-term securities + Accounts Receivable / Daily Expenses32.6 = $302,000 / $9,274
Percentage composition of current assets:
Cash $90,000 21%Short-term securities $62,000 14%Accounts receivable $150,000 34%Inventory $100,000 23%Prepaid expenses $35,000 8%
Current Assets $437,000 100%
2. Leverage and Capital Structure Ratios
Tangible equity = Total equity - intangible net worth$410,000 = $420,000 - $10,000
Long-term debt to tangible equity ratio:= Long-term debt / Tangible equity
0.40 = $132,000 / $410,000
Total debt to equity ratio = Current liabilities + Long-term debt / Total net worth1.29 = $540,000 / $420,000
Total debt to assets ratio (or debt to capital ratio):= Current liabilities + Long-term debt / Total assets= Current liabilities + Long-term debt / cur. liab. + l.t. debt + Net worth
0.56 = $540,000 / $960,000
Fixed assets to equity ratio = Fixed assets / Total net worth1.23 = $515,000 / $420,000
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Current liabilities to equity ratio:= Current liabilities / Total net worth
0.97 = $408,000 / $420,000
Overtrading ratio = Current Liabilities / Net worth - Intangible assets
0.98 = $408,000 /$420,000 - $3,000
Capitalization - all long-term capital
Net long-term debt $132,000 24%Preferred stock $100,000 18%Capital surplus $20,000 4%Common stock $50,000 9%Retained earnings $250,000 45%Common stockholders'
equity $320,000 58%Long-term Capital $552,000 100%
3. Profitability & Values Ratios
Net profit margin (return on sales):= Net income / Net Sales
6.3% = $234,500 / $3,700,000
Rate of return on capitalization (return on investment, ROI):= Net income / Total capitalization
42.5% = $234,500 / $552,000
Rate of return on assets (ROA):
= Net income / Total assets24.4% = $234,500 / $960,000
Rate of return on equity (ROE):= Net income / Total net worth
55.8% = $234,500 / $420,000
Rate of return on common stockholders' equity:= Net income - Preferred dividend / Common stockholders' equity
70.2% = $224,500 / $320,000
Gross profit margin = Gross profit / Net Sales
16.2% = $600,000 / $3,700,000
Operating margin = Operating profit / Net Sales8.5% = $315,000 / $3,700,000
Operating ratio = Cost of goods sold + General, selling & admin. / Net Sales0.91 = $3,100,000 + $285,000 / $3,700,000
Asset turnover = Net Sales / Operating Assets3.9 = $3,700,000 / $952,000
Earning power on assets = Operating margin x Asset turnover
33.1% = 8.5% x 3.89
Book value = Common stockholders' equity / number of shares outstanding$6.40 = $320,000 / 50,000
Note: Compute shares outstanding by dividing common stock (@ par value) on balance sheetby par value per share. Par value is simply a stated value of common stockfor accounting and legal purposes.
Earnings per share = Net income - Preferred dividend /(common stock) Number of shares outstanding
$4.49 = $234,500 - $10,000 / 50,000
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Cash flow per share = Net income + Depreciation / Number of shares outstanding(common stock)
$6.69 = $234,500 + $100,000 / 50,000
Market value = Earnings per share (EPS) x Price earnings multiple (P/E)
$53.88 = $4.49 x 12.00
Capitalization rate = 1 / Price earnings multiple (P/E)8.3% = 1 / 12.00
Yield = Dividends per share / price per share
3.71% = $2.00 / $53.88
Common Stock Payout ratio = Common stock dividends paid / Net income - Preferred dividend44.5% = $100,000 / $224,500
Dilution percent = Com. stock converted from pref. stock /Total shares outstanding after conversion
66.7% = 100,000 / 150,000
Diluted earnings per share = Total net income / Total shares outstanding after conversion$1.56 = $234,500 / 150,000
4. Turnover & Activity Ratios
Accounts payable days purchases outstanding= Accounts payable x 365 / Annual purchases
50.3 = $285,000 x 365 / $2,067,700
Accounts receivable average collection period
= Average accounts recievable x 365 / Annual credit sales13.3 = $135,000 x 365 / $3,700,000
Inventory turnover = Cost of goods sold / Average ending inventory32.6 = $3,100,000 / $95,000
Average days for = Average ending inventory x 365 / Cost of goods soldinventory to sell
11.2 = $95,000 x 365 / $3,100,000
Assset turnover = Net Sales / Average Assets
3.9 = $3,700,000 / $937,500
Gross margin return = (Pretax Income / Net Sales) xon inventory (Net sales / Aver. ending inventory)
3.26 = $309,500 / $3,700,000x $3,700,000 / $95,000
5. Coverage Ratios
Cash flow times interest earned ratio:= Earnings before interest and taxes + Depreciation - Dividends
/ Total debt interest expense
50.9 = $315,500 + $100,000 - $110,000/ $6,000
Times interest earned ratio = Earnings before interest and taxes / Total debt interest expense
52.6 = $315,500 / $6,000
Cash flow to current maturities ratio:= Pretax income + Depreciation - Dividends
/ Current Maturities of long-term debt10.0 = $299,500 / $30,000