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Sample Problems in Financial Ratios, Exercises of Entrepreneurship

STI Colleges and Education Centers (STICEC)Entrepreneurship

Two sample problems related to financial ratios. The first problem evaluates the performance of three divisions of a medical company based on their operating profit and average assets. The second problem computes the return on assets of a growing construction business based on its beginning and ending assets and net income. The solutions to both problems are provided along with an interpretation of the results. useful for students studying financial ratios and their applications in business decision-making.

Typology: Exercises

2021/2022

Available from 05/17/2022

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Sample Problems in Financial Ratios
1. Question: The management of International Heal Medical Company is evaluating the
performance of its three (3) divisions. The Booboo Division had operating profit of
₱24,950 and on average used assets with a book value of ₱311,900. The Splint Division
had an operating profit of ₱17,500 and used average assets of ₱177,950. The Intensive
Care Division had an operating profit of ₱28,500 and average assets of ₱475,000. The
company is planning to award the Intensive Care Division relying on its high operating
profit. Should the management continue with this decision? Justify your answer.
Given: Booboo Division has ₱24,950 of profit and average asset of ₱311,900.
Splint Division has ₱17,500 of profit and average assets of ₱177,950.
Intensive Care Division has ₱28,500 and average assets of ₱475,000.
Formula: ROA (Return of Assets) = Net Income/ Average Assets
Solution:
- Booboo Division: 24, 950 / 311, 900 = 0. 0799 or 7. 99%
- Splint Division: 17, 500 / 177, 950 = 0. 0983 or 9. 83%
- Intensive Care Division: 28, 500 / 475, 000 = 0. 06 or 6%
Answer: Yes, however I believe that the honor should be presented to the Split Division rather
than the Intensive Care Division. We can see that the Splint Division made money without using
too many assets after calculating the return on assets. This is significant since a business's or
company's purpose is to maximize profit while reducing the assets utilized in product
production. As a result, a larger percentage of return on assets is better for the organization,
and the Splint Division should receive the award.
2. Question: Charlie’s Construction Company is a growing construction business that
has a few contracts to build storefronts in Pasay. Charlie’s balance sheet shows
beginning assets of ₱1,000,000 and an ending balance of ₱2,000,000 of assets. During
the current year, Charlie’s company had a net income of ₱20,000,000. Compute for the
company’s return on assets and interpret the results.
Given: Beginning assets of ₱1,000,000 Net income: ₱20,000,000
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Sample Problems in Financial Ratios

  1. Question: The management of International Heal Medical Company is evaluating the performance of its three (3) divisions. The Booboo Division had operating profit of ₱24,950 and on average used assets with a book value of ₱311,900. The Splint Division had an operating profit of ₱17,500 and used average assets of ₱177,950. The Intensive Care Division had an operating profit of ₱28,500 and average assets of ₱475,000. The company is planning to award the Intensive Care Division relying on its high operating profit. Should the management continue with this decision? Justify your answer. Given: Booboo Division has ₱24,950 of profit and average asset of ₱311,900. Splint Division has ₱17,500 of profit and average assets of ₱177,950. Intensive Care Division has ₱28,500 and average assets of ₱475,000. Formula: ROA (Return of Assets) = Net Income/ Average Assets Solution:
  • Booboo Division: 24, 950 / 311, 900 = 0. 0799 or 7. 99%
  • Splint Division: 17, 500 / 177, 950 = 0. 0983 or 9. 83%
  • Intensive Care Division: 28, 500 / 475, 000 = 0. 06 or 6% Answer: Yes, however I believe that the honor should be presented to the Split Division rather than the Intensive Care Division. We can see that the Splint Division made money without using too many assets after calculating the return on assets. This is significant since a business's or company's purpose is to maximize profit while reducing the assets utilized in product production. As a result, a larger percentage of return on assets is better for the organization, and the Splint Division should receive the award.
  1. Question: Charlie’s Construction Company is a growing construction business that has a few contracts to build storefronts in Pasay. Charlie’s balance sheet shows beginning assets of ₱1,000,000 and an ending balance of ₱2,000,000 of assets. During the current year, Charlie’s company had a net income of ₱20,000,000. Compute for the company’s return on assets and interpret the results. Given: Beginning assets of ₱1,000,000 Net income: ₱20,000,

Ending balance assets of ₱2,000,000 Find: ROA (Return of Assets) Formula: ROA (Return of Assets) = Net Income/ Average Assets Solution: Net Income/ Average Assets = 20,000,000/ [(1,000,000 + 2,000,000)/2] = 20,000,000/ (3,000,000/2) =20,000,000/ 1,500, =13.33, ROA is 13. Answer: Charlie's return on asset (ROA) ratio is 13.33 percent. In other words, for every peso Charlie put into assets during the year, he earned ₱13.3 in net income. This can be a decent return rate regardless of the investment, depending on the economy. To obtain a clear sense of how well Charlie is managing his assets, investors should compare Charlie's return to that of other construction companies in his industry. building for more storage. Dave consults with his banker about applying for a new loan. The bank asks for Dave’s balance to examine his overall debt levels. The banker discovers that Dave has total assets of P5, 000, 000 and total liabilities of P25, 000. Compute for Dave’s debt ratio

  1. Question: Dave's Guitar Shop is thinking about building an addition onto the back of its existing building for more storage. Dave consults with his banker about applying for a new loan. The bank asks for Dave's balance to examine his overall debt levels. The banker discovers that Dave has total assets of ₱5,000,000 and total liabilities of ₱25,000. Compute for Dave's debt ratio. Given: Total assets: ₱5,000,000 Liabilities: ₱25,000 Find: Dave's debt ratio Formula: Debt Ratio: Total liabilities/ Total assets Solution: Total liabilities/ Total assets
  • 25,000/5,000,000 = 0.005 or 0.5, Debt ratio is 0.005 or 0. Answer: Because of how efficiently Dave manages his liabilities, the bank will almost certainly approve Dave's new loan. His debt-to-income ratio is 0.5, which is regarded modest and good. The debt ratio is an important factor that lenders consider when determining how financially comfortable you are with a new loan.