7.3 LC (Learning Consultants)‘s Financial ratios

 

As we discussed in the previous discussion, a service company such as an educational service provider may have different master budgets. In the similar way of thinking hypothetically real financial information, it’s planned or budgeted financial ratios will be different from the manufacturing one. For LC as one of privately funded educational service providers, some of the financial ratios would be applicable  and some would not.

In general, the applicable ratios for LC are the ones not related to the manufactured products such as,

1. Profit margin ratio :

Profit margin ratio :  ( Total Revenue - Total Expenses ) / Total Revenue  (Team, 2021).

Profit Margin = Net income / Revenue (Segal, 2021)

5% profit margin is considered low, 10 % is average and 20 % is high  (Anonimous,2021)

2. Return on asset (ROA)

Net income / Total average assets 

In general, ROA > 5% are considered good and > 20% are excellent (Hargrave, 2021).

3. Current ratio

Current Ratio = Current assets / Current liabilities (Fernando, 2021a). Good current ratio is 1.2 to 2 meaning that the current assets are 1.2 to 2 times the liabilities.

4. Quick ratio

QR = (CE + MS + AR)/CL

Note :

QR = Quick ratio

CE = Cash and equivalence

MS = Marketable securities

AR = Accounts receivable

CL = Current liabilities

(Seth, 2021)

Idealized quick ratio is 1 : 1 meaning that meeting current liabilities is not required in the context of technical solvency purposes. (Vaidya, n.d.).

5. Debt to equity ratio 

Debt/Equity= Total Liabilities / Total Shareholders’ Equity​​
the less the ratio, the better the financial health of the company meaning that the debt is not more than the equity. (Fernando, 2021b)      

Not applicable ratios for LC are the ones closely related to the manufactured products, inventories, credit sales, etc  such as,

1. AR turnover ratio
2. Average collection period
3. Inventory turnover ratios
4. Average sales period

In a more detailed semi hypothetical  calculation, the above applicable planned financial ratios which might be generated are based on the income statement of the previous work with it’s possibly generated balanced sheet. The following tables are the summaries of the calculation, articulation, evaluation and meanings of the results.

Table 1. Net income of LC (Learning Consultants of a certain year)

 

Table 2. Balanced sheet of LC (Learning Consultants) of a certain year

Table 3. Financial Ratios of LC (Learning Consultants) of a year

In this simulation, using the assumed retained earnings or net income + the amount of the previously assumed available amount in the beginning (Rp. 10000), table 3 summaries the profit margin is below average, return on asset is considered good, current ratio and debt to equity ratio is still not ideal. This can be analyzed by the fact that in the first year, LC is growing. Although it has below average profit margin based on enough income and revenues, and it has good ROA (return on asset) based on good income and total asset, LC is still unable to cover it’s liabilities making not ideal the current, quick and debt to equity ratio.    

Of the 5 financial ratios showing the fact that 3 of them are unfavorable and 2 are favorable, we can conclude that LC’s financial health is unfavorable at the year of growth. Hopefully, it’s growth will improve as the increase of sold tickets and improved the amounts of advertising as increasing numbers of subscribers. 

 

 

References

Segal, T. (2021, October 13). Profit margin. Investopedia. Retrieved October 20, 2021, from https://www.investopedia.com/terms/p/profitmargin.asp.

Anonimous. (2021, January 2). Profit margin. Corporate Finance Institute. Retrieved October 21, 2021, from https://corporatefinanceinstitute.com/resources/knowledge/accounting/profit-margin/.   

Team, I. E. (2021, February 23). How to calculate a profit margin ratio. Indeed Career Guide. Retrieved October 20, 2021, from https://www.indeed.com/career-advice/career-development/how-to-calculate-profit-margin-ratio.

 Hargrave, M. (2021, October 18). Return on assets definition. Investopedia. Retrieved October 20, 2021, from https://www.investopedia.com/terms/r/returnonassets.asp.

Fernando, J. (2021a, October 13). What is the current ratio? Investopedia. Retrieved October 20, 2021, from https://www.investopedia.com/terms/c/currentratio.asp.

Seth, S. (2021, October 20). Quick ratio. Investopedia. Retrieved October 20, 2021, from https://www.investopedia.com/terms/q/quickratio.asp.

Fernando, J. (2021b, October 13). Inventory turnover: Formula and calculation. Investopedia. Retrieved October 21, 2021, from https://www.investopedia.com/terms/i/inventoryturnover.asp.

Vaidya, D. (n.d). Quick ratio. Wallstreetmojo. Retrieved October 21, 2021, from https://www.wallstreetmojo.com/quick-ratio/.