Things You'll Need:
- Income statement
- Balance sheet
- Statement of cash flows
- Financial calculator
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Step 1
Gather all financial documents such as income statements, balance sheets and statement of cash flows. You will also need a financial calculator.
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Step 2
Perform calculations for financial ratios. Have a financial calculator or a spreadsheet handy. Work on the following calculations: liquidity (five calculations), operating profitability (six calculations), financing (two calculations) and equity return (one calculation).
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Step 3
Understand the following liquidity calculations: Current ratio equals current assets/current liabilities. Average collection period equals accounts receivable/daily credit sales. Accounts receivable turnover equals credit sales/accounts receivable. Inventory turnover equals cost of goods sold/inventory.
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Step 4
Know operating profitability calculations. Operating income return on investment equals operating income/total assets. Operating profit margin equals operating income/sales. Total asset turnover equals sales/total assets. Accounts receivable turnover equals credit sales/accounts receivable. Inventory turnover equals cost of goods sold/inventory; and fixed assets turnover equals sales/sales/net fixed assets.
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Step 5
Learn financing calculations. Debt ratio equals total debt/total assets. Times interest earned equals operating income/interest.
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Step 6
Know return on equity calculations. Return on equity equals net income/common equity.
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Step 7
Consider optional information. For each area in the analysis and your competitors in the industry calculate a grade card report. This can be done by calculating the standard deviation of the ratios within the industry for your company and those of your competitors to see you each of you line up.
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Step 8
Insert the calculations into your report format for each of the four sections. Interpret the calculations.
