Vocabulary and practice of organizational finance

Vocabulary and Practice of Organizational Finance






Vocabulary and Practice of Organizational Finance

Arrow Company


Plume Company


Rate of Return on Equity (ROE)

= Net Income/ Shareholders’ Equity


= 0.265


= 0.312

Return on Assets (ROA)

= Net Income/ Total Assets


= 0.149


= 0.187

Gross Margin

= Gross Profit/ Sales


= 0.402


= 0.045

Inventory Turnover

= Cost of Goods Sold/ Ending Inventory


= 6.091


= 3.558

Collection Period

= Accounts Receivable/ Credit Sales per Day.

Sales per Day = Yearly Total Sales/ 365

Sales per day

4,275,000/365 = 11712.329

410,000/11712.329 = 35.006

4,805,000/365 = 13164.384

575,500/13164.384 = 43.176

Fixed Asset Turnover

= Sales/ Total Fixed Assets

4,275,000/1,395,000 = 3.0654,805,000/2,512,000 = 1.913Financial Leverage Ratios

Debt to Asset Ratio = Total Liabilities / Total Assets

Debt to Equity Ratios = Total Liabilities/ Shareholders’ Equity

940,500/3,385,700 = 0.278

940,500/2,189,200 = 0.430

1,785,500/ 4,467,500 = 0.400

1,785,500/2,682,000 = 0.666

Liquidity Ratios

Current Ratio = Current Assets/ Current


Acid Test = (Current Assets – Inventory)/ Current Liabilities

2,135,700/940,500 = 2.271

(2,135,700- 435 500)/ 940,500 = 1.808

1,930,500/1,370,000 = 1.409

(1,930,500- 595,000)/ 1,370,000 = 0.975


Using the given calculations, Arrow Company is in a better financial position and is therefore more stable than the Plume Company. Focusing on the rate of return on equity for both companies and net income per shareholder’s equity, Plume Company is in a better position than Arrow Company. Plume Company is accruing more return on its assets than Arrow Company is. Arrow Company is notably receiving more Gross Profit on its sales than Plume Company. Regarding debt collection, Plume Company is in a better position than Arrow Company is. Arrow’s fixed assets offer better returns than Plume’s fixed assets while its liquidity ratio places the company in a better position than Plume.

The assignment has been quite informative on ways of identifying a company’s positioning as a going on concern. Analysts do not just check focus on the financial reports since they also need to compute various ratios in order to determine a company’s performance. However, I find it hard to analyze completely a financial report of a real company since they tend to utilize technical terms used that I am unfamiliar with. However, ensuring more practice with regard to formulae application will be helpful in computing the ratios for purposes of knowledge acquisition and examination needs. Additionally, I will also apply myself to more research in order to gain a higher acquaintance with the given ratios as well as others.