Final financial ratio analysis assignment


This term you have learned to understand a company’s financial story using the language of accounting. The recording and reporting of information is essential to decision makers and other users of financial information; numbers on the various financial statements are used to help further understand the financial condition of the business. This process is known as financial ratio analysis and allows us to analyze the company’s financial position in relation to other organizations in the industry. In this final assignment, you will apply the concepts you have learned throughout the term to perform financial statement analysis and to offer some recommendations. 

Assume that you are a health care consultant hired by the Dependable DME Company. DME is Durable Medical Equipment and includes all equipment that benefits patients who have certain medical conditions. The owner of the company, David Smith, is interested in applying for a loan to expand his business; he desires to open a second location in another city. He is preparing to apply to a local bank for a loan. 

The bank will base its decision on the following averages for the DME industry:



Industry Average


Current   ratio



Quick   ratio



Receivables   turnover ratio



Inventory   turnover ratio



Debt   to assets ratio



Profit   margin


The balance sheet data for Dependable DME Company follows:


December 31, 2017

December 31, 2016






Accounts   receivable








Prepaid   insurance




Total current assets




Property   and equipment




Accumulated   depreciation




Total property and equipment




Total assets




Accounts   payable




Other   current liabilities




Total current liabilities




Bonds   payable




Total liabilities




Common   stock




Retained   earnings




Total stockholders’ equity




Total liabilities and stockholders’   equity



The income statement data for Dependable DME Company follows:





Cost   of goods sold



Gross profit



Operating   expenses



Operating income



Interest   expense



Income before taxes



Income   tax expense



Net   income



  1. Calculate the following six (6) ratios: Current Ratio, Quick Ratio, Receivables      Turnover Ratio, Inventory Turnover Ratio, Profit Margin Ratio and Debt to Assets      Ratio. Be sure to show the actual calculation as well as your final      answer. 

You are only required to calculate the ratios for 2017; however, for two of the ratios (Receivables Turnover Ratio and Inventory Turnover Ratio), you will need data from 2016 for the formula. When calculating the Quick Ratio, please note that Short-Term Investments are $0 in this scenario. (24 points; 4 points for each ratio calculation)

  1. Below each ratio, comment on the interpretation of      the ratio. In other words, what does the result tell you, specifically? (8      points)
  2. Based upon the industry averages upon which the bank      relies, should they approve the loan to Mr. Smith? Why or why not? (7      points)
  3. In one-half page, comment on what financial aspect      of Dependable DME Company looks good and where can Mr. Smith make some      improvements. Specifically identify at least two recommendations to Mr.      Smith that can be made to improve the financial position of his business.      (8 points)
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