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,
- 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)
- Return on asset (ROA)
Net income / Total average assets
In general, ROA > 5% are considered good and > 20%
are excellent (Hargrave, 2021).
- 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.
- 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.).
- 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,
- AR
turnover ratio
- Average
collection period
- Inventory
turnover ratios
- 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/.
