Financial Evaluation Measures 1.

Activity Ratio Activity ratios measure a firm's ability to convert different accounts within their balance sheets into cash or sales. Companies will typically try to turn their production into cash or sales as fast as possible because this will generally lead to higher revenues. Such ratios are frequently used when performing fundamental analysis on different companies. The asset turnover ratio and working capital turnover ratio are good examples of activity ratios. Asset Turnover Net Sales Average Total (1) Assets (2) 632,975.00 165,946.81 740,600.00 318,479.41 891,180.00 379,401.86 1,042,740.00 445,280.01 1,253,930.00 539,807.40

Year 2014 2015 2016 2017 2018

Ratio (1)/(2) 3.81 2.33 2.35 2.34 2.32

The total asset turnover ratio measures the ability of a company to use its assets to efficiently generate sales. This ratio considers all assets, current and fixed. The lower the total asset turnover ratio, as compared to historical data for the firm and industry data, the more sluggish the firm's sales. This may indicate a problem with one or more of the asset categories composing total assets inventory, receivables, or fixed assets. The small business owner should analyze the various asset classes to determine in which current or fixed asset the problem lies. The problem could be in more than one area of current or fixed assets. Since current assets also include the liquidity ratios, such as the current and

quick ratios, a problem with the total asset turnover ratio could also be traced back to these ratios. Many business problems can be traced back to inventory but certainly not all. The firm could be holding obsolete inventory and not selling inventory fast enough. With regard to accounts receivable, the firm's collection period could be too long and credit accounts may be on the books too long. Fixed assets, such as plant and equipment, could be sitting idle instead of being used to their full capacity. All of these issues could lower the total asset turnover ratio. Working Capital Turnover Operating Working Capital Expenses (3) (2) 130,995.55 178,851.77 133,498.30 222,627.56 147,821.54 261,108.56 155,698.26 312,744.09 171,500.20 400,437.86

Year 2014 2015 2016 2017 2018

Cost of Sales (1) 292,977.00 349,650.16 435,935.12 518,624.00 631,670.25

Ratio [(1)+(2)]/3] 2.37 2.17 2.24 2.16 2.01

Net working capital is a financial metric a business owner can use in order to help measure the cash and operating liquidity position of the business firm. The net working capital metric is directly related to the current ratio. If you look at the calculation of the current ratio, you see that you use the same balance sheet data to calculate net working capital. Cash management and the management of operating liquidity is important for the survival of the business firm. A firm can make a profit, but if they have a problem with their cash position, they won't survive.

2. Liquidity Ratio Liquidity is the ability of the firm to convert assets into cash. It is also called marketability or short-term solvency. The liquidity of a business firm is usually of particular interest to its short-term creditors since the liquidity of the firm measures its ability to pay those creditors. Several financial ratios measure the liquidity of the firm. Those ratios are the current ratio, the quick ratio or acid test, net working capital, and the interval measure or the burn rate. Current Ratio Current Assets Current Liabilities (1) (2) 272,208.31 93,356.54 333,747.57 111,120.01 396,382.61 135,274.05 467,863.26 155,119.17 587,826.71 187,388.85

Year 2014 2015 2016 2017 2018

Ratio (1)/(2) 2.92 3.00 2.93 3.02 3.14

The current ratio is probably the best known and most often used of the liquidity ratios. Liquidity ratios are used to evaluate the firm's ability to pay its short-term debt obligations such as accounts payable (payments to suppliers) and accrued taxes and wages. Short-term notes payable to a bank, for example, may also be relevant. On the balance sheet, the current portions of the document are assets and liabilities that convert to cash within one year. Current assets and current liabilities make up the current ratio. This is obviously a good position for the firm to be in. It can meet its short-term debt obligations with no stress. If the current ratio was less than 1.00X, then the

firm would have a problem meeting its bills. So, usually, a higher current ratio is better than a lower current ratio with regard to maintaining liquidity. Quick Ratio Cash Current Liabilities (1) (2) 263,498.31 93,356.54 318,649.57 111,120.01 374,650.86 135,274.05 439,040.76 155,119.17 551,847.96 187,388.85

Year 2014 2015 2016 2017 2018

Ratio (1)/(2) 2.82 2.87 2.77 2.83 2.94

The quick ratio, sometimes called the acid-test, is a more stringent test of liquidity than the current ratio. This is because it removes inventory from the equation. Inventory is the least liquid of all the current assets. A business has to find a buyer if it wants to liquidate inventory, or turn it into cash. Finding a buyer is not always easy. This is obviously a good position for the firm to be in. It can meet its short-term debt obligations with no stress. If the quick ratio was less than 1.00X, then the firm would have to sell inventory to meet its obligations. So, a quick ratio greater than 1.00X is better than a quick ratio of less than 1.00X with regard to maintaining liquidity and not being forced into the position of having to sell inventory.

III. Profitability Ratio Profitability ratios show a company's overall efficiency and performance. We can divide profitability ratios into two types: margins and returns. Ratios that show margins represent the firm's ability to translate sales into profits at various

stages of measurement. Ratios that show returns represent the firm's ability to measure the overall efficiency of the firm in generating returns for the partners. Gross Profit Ratio Gross Profit Net Sales (1) (2) 339,998.00 632,975.00 390,949.84 740,600.00 465,244.88 891,180.00 524,116.00 1,042,740.00 622,259.75 1,253,930.00

Year 2014 2015 2016 2017 2018

Ratio (1)/(2) .54 .53 .52 .50 .50

The gross profit margin is a margin ratio. Gross profit is what is left over after paying all variable costs or costs associated with producing product or service. It is important to track the gross profit margin in order to track profitability. Small business owners are always looking to improve their gross profit margins. In other words, they want to decrease their cost of goods sold or variable costs while increasing their sales revenues. Typically, there are two ways to do this. First, increase the price of the product. However, a careful nature is encouraged when doing so, particularly in a poor business climate. If a mistake has been made and the increase in prices is too much, sales can drop. In order to increase prices successfully, gauging the economic environment, the competition, and the supply and demand of the product, along with customer base is a must. Second, decrease the cost of making the product or the variable costs. This is just as tricky as increasing the price of the product. Rate of Return on Sales Net Income Net Sales (1) (2) 151,349.08 632,975.00 192,596.09 740,600.00

Year 2014 2015

Ratio (1)/(2) .24 .26

2016 2017 2018

237,301.30 275,455.83 336,514.08

891,180.00 1,042,740.00 1,253,930.00

.27 .26 .27

The net profit margin ratio is a profitability ratio that is a margin ratio. It can be calculated by using numbers off the company's income statement. Net profit margin is the number of pesos of after-tax profit a firm generates per peso of sales. Net profit margin indicates how well the company converts sales into profits after all expenses are subtracted out. Since industries are so different, the net profit margin is not very good at comparing companies in different industries. It is good, however, at comparing companies in the same industry if you want to look at the bottom line. It is also a good time-series analysis measure whereby business owners can look at data for their own company across different time periods to see how the net profit margin is trending. Financial ratios are only useful when comparative analysis is used. Companies that generate greater profit per peso of sales are more efficient. Net income is affected by the company's actions to reduce expenses and the denominator (net sales) is affected by the company's actions to increase sales revenue. Both actions will increase the net profit margin ratio. Operating Ratio Operating Expenses (2) 130,995.55 133,498.30 147,821.54 155,698.26 171,500.20

Year 2014 2015 2016 2017 2018

Cost of Sales (1) 292,977.00 349,650.16 435,935.12 518,624.00 631,670.25

Net Sales (3) 632,975.00 740,600.00 891,180.00 1,042,740.00 1,253,930.00

Ratio [(1)+(2)]/3] .67 .65 .66 .65 .64

The operating profit margin is a type of profitability ratio known as a margin ratio. The information with which to calculate the operating profit margin comes from a company's income statement. The operating profit margin gives the business owner a lot of important information about the firm's profitability, particularly with regard to cost control. It shows how much cash is thrown off after most of the expenses are met. A high operating profit margin means that the company has good cost control and/or that sales are increasing faster than costs, which is the optimal situation for the company. Operating profit will be a lot lower than the gross profit since selling, administrative, and other expenses are included along with cost of goods sold. As the company grows and sales revenue grows, overhead, or fixed costs, should become a smaller and smaller percentage of total costs and the operating profit margin should increase. A high operating profit margin usually means that the business firm has a low-cost operating model.

Year 2014 2015 2016 2017 2018

Rate of Return on Assets Net Income Average Total (1) Assets (2) 151,349.08 165,946.81 192,596.09 318,479.41 237,301.30 379,401.86 275,455.83 445,280.01 336,514.08 539,807.40

Ratio (1)/(2) 91.20% 60.47% 62.55% 61.86% 62.34%

The return on assets ratio is a profitability ratio which is a returns ratio. The return on assets ratio is also called the return on investment ratio. Return on assets allows the business owner to calculate how efficiently the company is using their total asset base to generate sales. Total assets include all current assets such as cash, inventory, and accounts receivable in addition to fixed assets such as plant and equipment. The reason that the return on assets ratio is also called the return on investment ratio is because "investment" refers to the firm's investment in its assets. In order to interpret the Return on Assets ratio, comparative data such as trend (time series) or industry data is needed. The business owner can look at the company's return on assets ratio across time and also at industry data to see where the company's return on assets ratio lies. The higher the return on assets ratio, the more efficiently the company is using its asset base to generate sales.