Solutions/Accounting & Finance
Accounting & FinanceLevel: Intermediate

Financial Ratio Analysis: Comprehensive Corporate Case Study

Reviewed by David Thorne, FCA.
Free Educational Resource
Problem Statement / Assignment Scope

Given balance sheet and income statement extracts for a manufacturing firm with Current Assets £180k, Inventory £60k, Current Liabilities £90k, Total Debt £200k, and Equity £300k, compute and interpret liquidity and leverage metrics.

Prerequisites: Balance sheet structure, income statement metrics, and basic arithmetic.

Step-by-Step Worked Solution

1. Computed Ratio Metrics

  1. Current Ratio: Current Assets / Current Liabilities = £180,000 / £90,000 = 2.0x (Healthy benchmark is typically 1.5x–2.0x).
  2. Quick (Acid-Test) Ratio: (Current Assets - Inventory) / Current Liabilities = (£180,000 - £60,000) / £90,000 = 1.33x (Demonstrates strong short-term liquidity without relying on inventory liquidation).
  3. Debt-to-Equity Ratio: Total Debt / Total Equity = £200,000 / £300,000 = 0.67x (Reflects moderate conservative leverage).

Key Takeaways & Core Principles

  • The Quick Ratio is more conservative than Current Ratio because it excludes slow-moving inventory.
  • Always benchmark computed ratios against specific industry averages rather than generic rules of thumb.

Frequently Asked Questions

What does the DuPont 3-part formula break ROE into?

ROE = Net Profit Margin × Asset Turnover × Financial Leverage Multiplier.

Academic References & Standards

  • [1]Ross, S., Westerfield, R., & Jaffe, J. (2022). Corporate Finance. McGraw-Hill. Source Link
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