Analyzing Financial Statements Using RatiosA financial statement ratio is computed by dividing the total dollar amount of one item reported in the financial statements by the dollar amount of another item reported. The purpose is to express a relationship between two relevant items that is easy to interpret and compare with other information. For example, the relationship of current assets to current liabilities called the current ratio is of interest to most users. For a firm reporting current assets of $210 000 and current liabilities of $120 000, the current ratio is 1.75 (210000/120000). This means that the company has $1.75 in current assets for every $1.00 of its liabilities.

The relationship could be converted to a percentage (175%) by multiplying the ratio by 100. In ratio form or as a percentage, the relationship between the two items can be more easily compared to other standards, such as the current ratio of other companies, or an industry wide ratio.

Ratios are classified according to their evaluation of a firm’s profitability, liquidity, and solvency. In addition, there are certain ratios that are used to measure short term (less than a year) and long term (more than a year).

Calculating RatiosThe following are comparative financial statements for the Clark Corporation.

Using the following information, calculate the following ratios. First state the formula, then perform the calculation.

Ratio Formula Calculation

Return on Total Assets

Return on Common Stockholders’ Equity

Return on Sales

Earnings per Share

Price Earnings Ratio

Dividend Yield

Dividend Payout

Current Ratio

Receivable Turnover

Inventory Turnover

Debt to Total Assets

Time Interest Earned