Solutions for Liquidity, leverage and Profitability based on 2015’s SFP:

LIQUIDITY RATIOS FOR THE YEAR 2015

Formula Answer
Current Ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 11,380,000.00
= 4.74
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 2,400,000.00
Quick Asset Ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 − 𝑃𝑟𝑒𝑝𝑎𝑖𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 11,380,000.00 − 3,400,000.00 − 0
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 2,400,000.00
= 3.33
Based on the liquidity ratios above of Zapatoes, Inc., the current ratio shows the favorability of a
company to pay short-term debts for P4.74 for every P1.00 liability. Also, the quick asset ratio shows
that even if the inventories are deducted from the current asset, the company would still be able to pay
P3.33 for every P1.00 liability.

LEVERAGE RATIOS
Formula Answer
Debt Ratio 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 4,400,000.00
= 0.39
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 11,380,000.00
Debt-to-Equity 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 4,400,000.00
= 0.63
Ratio 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 6,980,000.00
Interest Coverage 𝐸𝐵𝐼𝑇 3,919,428.57
= 15.80
Ratio 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 248,000.00
The table above shows that Zapatoes, Inc. has higher equity liabilities. Also, the earnings are
enough to cover the interest expense based on the computation for Interest Coverage Ratio. This is a
good sign that the company can still invest through loans.
PROFITABILITY RATIOS FOR THE YEAR 2015
Formula Answer
Return on Equity 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 2,570,000.00
= 0.37
𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝐸𝑞𝑢𝑖𝑡𝑦 6,980,000.00
Return on Assets 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 2,570,000.00
= 0.23
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 11,380,000.00
Gross Profit Margin 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 6,269,428.57
= 0.68
𝑆𝑎𝑙𝑒𝑠 9,219,747.90
Operating Profit Margin 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 3,919,428.57
= 0.43
𝑆𝑎𝑙𝑒𝑠 9,219,747.90
Net Profit Margin 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 2,570,000.00
= 0.28
𝑆𝑎𝑙𝑒𝑠 9,219,747.90
The tables above shows that the company could afford to invest in loans. But, this will not
guarantee that the company could still pay after adding 6% and 10% interest rate from option 2 and 3.
 PROFITABILTY RATIO, LIQUIDITY RATIO AND LEVERAGE RATIO SOLUTION FOR OPTION 2.

Short-term loan for 1 year for PHP10 million at 6% per annum from Short time Bank.

LIQUIDITY RATIOS AFTER ADDING THE 6% INTEREST RATE

Formula Answer
Current Ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 11,380,000.00
=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 2,400,000.00 + 10,600,000.00
11,380,000.00
=
13,000,000.00
= 0.88
Quick Asset Ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 − 𝑃𝑟𝑒𝑝𝑎𝑖𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 11,380,000.00 − 3,400,000.00 − 0
=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 2,400,000.00 + 10,600,000.00
11,380,000.00 − 3,400,000.00 − 0
=
13,000,000.00
= 0.61

From the computation above, it would be hard for the Zapatoe’s Inc. to pay for their obligation
since the current ratio is only P0.88 from P4.74 for every P1.00 liability. Also, the quick asset ratio falls
also from P3.33 to P0.61. Favorable current ratio must always be greater than P1.00.

LEVERAGE RATIOS AFTER ADDING THE 6% INTEREST RATE

Formula Answer
Debt Ratio 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 4,400,000.00 + 10,600,000.00
=
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 11,380,000.00 + 10,000,000.00
15,000,000.00
=
21,380,000.00
= 0.70
Debt-to-Equity 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 4,400,000.00 + 10,600,000.00
=
Ratio 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 6,980,000.00 − 600,000.00
15,000,000.00
=
6,380,000.00
=2.26
Interest Coverage 𝐸𝐵𝐼𝑇 3,919,428.57
=
Ratio 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 248,000.00 + 600,000
3,919,428.57
=
848,000.00
=4.62
The interest coverage ratio still shows that the company could still pay the interest expense.
However, the debt ratio exceeds to 0.70 thus, it has now more liabilities that the equity. This is not
considered as a healthy and growing company.
 PROFITABILITY RATIOS FOR THE YEAR 2015 ADDING THE 6% INTEREST RATE
Formula Answer
Return on Equity 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 2,570,000.00 − 600,000.00
=
𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝐸𝑞𝑢𝑖𝑡𝑦 6,980,000.00
1,970,000.00
=
6,980,000.00
= 0.28
Return on Assets 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 2,570,000.00 − 600,000.00
=
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 11,380,000.00 + 10,000,000.00
1,970,000.00
=
21,830,000.00
= 0.09
Gross Profit Margin 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 6,269,428.57
= 0.68
𝑆𝑎𝑙𝑒𝑠 9,219,747.90
Operating Profit Margin 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 3,919,428.57
= 0.43
𝑆𝑎𝑙𝑒𝑠 9,219,747.90
Net Profit Margin 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 2,570,000.00 − 600,000
=
𝑆𝑎𝑙𝑒𝑠 9,219,747.90
1,970,000.00
=
9,219,747.90
=0.21
Although the return on equity drops from P0.37 to P0.28, it could still generate for every P1
capita. But the ROA was greatly affected from P0.23 to P0.09 for every P1 asset, making the company
unable to invest until its time for payment. The net profit would still gain profit even though it also
decreased from P0.28 to 0.21 for every P1.00 revenue.

PROFITABILTY RATIO, LIQUIDITY RATIO AND LEVERAGE RATIO SOLUTION FOR OPTION 3.

• Long-term loan for 5 years for PHP10 million at 10% per annum from Longly Bank.

LIQUIDITY RATIOS AFTER ADDING THE 10% INTEREST RATE

Formula Answer
Current Ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 11,380,000.00
=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 15,000,000.00
2,400,000.00 + ( )
5 𝑦𝑒𝑎𝑟𝑠
11,380,000.00
=
2,400,000.00 + 3,000,000.00
11,380,000.00
=
5,400,000.00
= 2.11
Quick Asset Ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 − 𝑃𝑟𝑒𝑝𝑎𝑖𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 11,380,000.00 − 3,400,000.00 − 0
=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 15,000,000.00
2,400,000.00 + ( )
5 𝑦𝑒𝑎𝑟𝑠
11,380,000.00 − 3,400,000.00 − 0
=
2,400,000.00 + 3,000,000.00
7,980,000.00
=
5,400,000.00
 = 1.48

The table above still shows a good current ratio which is greater than P1.00, even after adding
P3,000,000.00 for the loan which is good for 5 years. Thus, the company would still be able to pay its
obligation on time with P2.11 for every P1.00 liabilities.

LEVERAGE RATIOS AFTER ADDING THE 10% INTEREST RATE

Formula Answer
Debt Ratio 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 4,400,000.00 + 15,000,000.00
=
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 11,380,000.00 + 10,000,000.00
19,400,000.00
=
21,380,000.00
= 0.91
Debt-to-Equity 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 4,400,000.00 + 15,000,000.00
=
Ratio 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 6,980,000.00 − 600,000.00
19,400,000.00
=
6,380,000.00
=2.78
Interest Coverage 𝐸𝐵𝐼𝑇 3,919,428.57
=
Ratio 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 248,000.00 + 1,000,000
3,919,428.57
=
1,248,000.00
=3.14
The leverage ratios are more dreadful after adding the 10% annual interest giving the company
P15,000,000 debt.
 PROFITABILITY RATIOS FOR THE YEAR 2015 ADDING THE 10% INTEREST RATE
Formula Answer
Return on Equity 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 2,570,000.00 − 1,000,000.00
=
𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝐸𝑞𝑢𝑖𝑡𝑦 6,980,000.00
1,570,000.00
=
6,980,000.00
= 0.22
Return on Assets 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 2,570,000.00 − 1,000,000.00
=
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 11,380,000.00 + 10,000,000.00
1,570,000.00
=
21,830,000.00
= 0.07
Gross Profit Margin 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 6,269,428.57
= 0.68
𝑆𝑎𝑙𝑒𝑠 9,219,747.90
Operating Profit Margin 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 3,919,428.57
= 0.43
𝑆𝑎𝑙𝑒𝑠 9,219,747.90
Net Profit Margin 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 2,570,000.00 − 1,000,000
=
𝑆𝑎𝑙𝑒𝑠 9,219,747.90
1,570,000.00
=
9,219,747.90
=0.17
The return on equity ratio could still be considered high and can still make net profits, however,
due to the P1,000,000 interest expense deducted from the net income, the profitability ratio is a smaller
than with the 6% interest rate.

PROFITABILTY RATIO, LIQUIDITY RATIO AND LEVERAGE RATIO SOLUTION FOR OPTION 1.

• Accept a PHP10 million equity investment from his friend, Alex. Alex will hold 45% percent
ownership of the business afterwards. Alex does not demand any specific return.

LIQUIDITY RATIOS OF ALEX’S PROPOSAL FOR THE YEAR 2015

Formula Answer
Current Ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 11,380,000.00
=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 2,400,000.00
= 4.74

Quick Asset Ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 − 𝑃𝑟𝑒𝑝𝑎𝑖𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 11,380,000.00 − 3,400,000.00 − 0
=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 2,400,000.00
7,980,000.00
=
2,400,000.00
= 3.33
The liquidity ratio will remain the same from the 2015’s liquidity ratio without any interests
added.
 LEVERAGE RATIOS OF ALEX’S PROPOSAL FOR THE YEAR 2015
Formula Answer
Debt Ratio 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 4,400,000.00
=
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 11,380,000.00 + 10,000,000.00
4,400,000.00
=
21,380,000.00
= 0.21
Debt-to-Equity 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 4,400,000.00
=
Ratio 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 6,980,000.00 + 10,000,000.00
4,400,000.00
=
16,980,000.00
=0.26
Interest Coverage 𝐸𝐵𝐼𝑇 3,919,428.57
=
Ratio 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 248,000.00
=15.80
The debt ratio is P0.21, the debt-to-equity ratio is P0.26 and the Interest coverage ratio is
P15.50. This indicates that Zapatoe’s Inc. is healthier than having loans with interests.
PROFITABILITY RATIOS OF ALEX’S PROPOSAL FOR THE YEAR 2015
Formula Answer
Return on Equity 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 2,570,000.00
=
𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝐸𝑞𝑢𝑖𝑡𝑦 6,980,000.00 + 10,000,000.00
1,570,000.00
=
16,980,000.00
= 0.15
Return on Assets 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 2,570,000.00
=
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 11,380,000.00 + 10,000,000.00
1,570,000.00
=
21,830,000.00
= 0.12
Gross Profit Margin 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 6,269,428.57
= 0.68
𝑆𝑎𝑙𝑒𝑠 9,219,747.90
Operating Profit Margin 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 3,919,428.57
= 0.43
𝑆𝑎𝑙𝑒𝑠 9,219,747.90
Net Profit Margin 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 2,570,000.00
=
𝑆𝑎𝑙𝑒𝑠 9,219,747.90
=0.28
Because of the additional investment, the return on equity decreases from P0.37 to P0.15 and
the return on assets, from P0.22 to 0.12. However, the Gross and Operating profit margin remains the
same, and will grow more years from now.
 Based on the computations above, the issue with the second option is that it has insufficient
time to pay for such a massive debt, including interest alone, when combined with other current debts;
the company struggles to meet its obligations on time. As a result, just the two options remained, and
the Efficiency ratio is performed below to determine the ideal option:

Formula Answer

Accounts Receivables Turnover 𝑆𝑎𝑙𝑒𝑠 2,919,747.90

=
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 7,800,000.00
= 0.37
Average Collection Period 365 365
=
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 0.37
=986.49
Inventory Turnover 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 2,950,319.33
=
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 3,400,000.00
=0.87
Average Age of Inventory 365 365
=
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 0.87
=419.54
Accounts Payable turnover 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 0
=
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 3,400,000.00
=0
Average Payment Period 365 365
=
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 0
=0
Operating Cycle Average Collection Period + Average Age of =986.49+ 419.54
Inventory =1,406.03
Cash Conversion Cycle Operating Cycle – Average Age of Payables =1,406.00-0.00
=1,406.00

Since the company has so many receivables but less cash, we discover that it is not enough to
pay for its obligations. The average collection period is 986.49 days, while the Average Age of Inventory
is only 419.54. Thus, the best option to choose is Mr. Alex's Proposal. Besides the excellent result of the
computations shown above, opening a new production facility would be hard for Sir Anthony to manage
alone. So, it would be great if Alex would also help manage the business, knowing that he is also an
investor and will not do anything that might harm their company.