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BUS 312Unit 3

Ratios raise questions. DuPont finds the answer.

Five families of ratios on one company, what each one is really asking, and the DuPont identity that shows which driver moved ROE.

Why ratios · Step 1 of 11

Cedar Ridge has $4,000 thousand of assets. Is that a lot?

In raw dollars ($ thousands), one scale
Alder Crafts (small)
Total assets$400
Net income$48
Cedar Ridge (ours)
Total assets$4,000
Net income$840
Summit Industrial (large)
Total assets$60,000
Net income$3,000

The big firm swamps the picture. The small firm's bars are barely visible, so you cannot tell who is doing well.

On its own, the question has no answer. A dollar amount needs something to compare against. A ratio divides one number by another, which removes the size of the firm. That lets you compare a small firm with a large one, and a firm with itself over time.
Try it: Look at the dollars first, then switch to ratios. Then compare the firm with itself a year earlier.
Compare
Cedar Ridge Manufacturing, 2026 · $ thousands
Total assets
$4,000
Net income
$840
Return on assets
21.0%
1. Liquidity (short-term solvency)
Can the firm pay the bills due within a year?
2. Leverage (long-term solvency)
How much of the firm is paid for with borrowed money, and can it pay the interest?
3. Turnover (asset management)
How hard do the assets work to produce sales?
4. Profitability
How much profit comes from sales, assets and the owners' money?
5. Market value
What do investors pay for the shares, compared with earnings and book value?
Practise

Practise the ratios and DuPont

Year-end figures, 365 days, and the slides' definitions. Answer first, then check. Stuck? Open the solution one line at a time.

Score
0 / 0
LiquidityQuestion 1 of 14
Birchwood Foods has cash of $90, accounts receivable of $210 and inventory of $300. It owes suppliers $170 and has a $80 bank note due this year (all $ thousands). Find the three liquidity ratios.

Midterm coming up and cash flow still feels slippery?

Bring your problem sets. We work through them together until every type feels routine.

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