| Course | GM506 Strategic Financial Analysis |
|---|---|
| Unit | Unit 2 |
| Paper type | Ratio analysis |
| Length | About 920 words, 6 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | MS in Management |
| Updated | October 2026 |
Free sample paper for GM506 Unit 2
Five Ratios and One Question: A Unit 2 Ratio Analysis of a Growing Truss Manufacturer
[Student Name]
Purdue University Global
GM506: Strategic Financial Analysis
Unit 2 Ratio Analysis
[Instructor Name]
[Date]
Haddon Truss and Panel and every figure are composite and illustrative; the methods and sources cited are real.
The Question
Haddon Truss and Panel's sales rose 5 percent in 2025, from $63.4 million to $66.6 million, mostly from builders farther from its single plant. The owners want to know whether that growth is making the company stronger or merely bigger. The analysis asks one question: is the company earning enough on its growth to fund it without weakening its finances?
Why These Five
A full ratio workup can produce twenty or thirty measures, most of which say little about a specific question. Stephen Penman argues that ratio analysis is most useful when it is organized around how a business generates returns and how it is financed, rather than as a checklist (Penman, 2013). Five measures answer the owners' question. Operating margin shows whether each dollar of sales is still as profitable. Return on invested capital shows whether the business earns more than its owners require on the money tied up in it. Receivable days show how much cash the growth ties up in unpaid invoices. Net debt to EBITDA and interest coverage show whether borrowing to fund that cash is becoming a strain.
Operating Margin
Formula. Operating income divided by revenue.
Inputs. Operating income from the income statement: $4.25 million in 2024 and $3.76 million in 2025. Revenue: $63.4 million and $66.6 million.
Result. 6.7 percent in 2024, 5.6 percent in 2025.
Reading. Sales grew by $3.2 million while operating income fell by about $490,000. The company is selling more and earning less on each dollar. The next unit will look at why, but the hauling line in the cost of sales, which rose faster than revenue, is the obvious place to start.
Return on Invested Capital
Formula. Operating income after tax divided by invested capital, where invested capital is net working capital plus net property, plant and equipment.
Inputs. After-tax operating income at the 25 percent tax rate: $3.19 million in 2024 and $2.82 million in 2025. Invested capital: $32.5 million in 2024, of which $12.1 million is working capital and $20.4 million is plant and equipment; $35.3 million in 2025, of which $13.9 million is working capital and $21.4 million is plant and equipment.
Result. 9.8 percent in 2024, 8.0 percent in 2025, against the owners' hurdle of 10.5 percent.
Reading. Return on invested capital was already below the hurdle in 2024 and fell further. Tim Koller and colleagues emphasize that growth creates value only when returns on new capital exceed its cost (Koller et al., 2020). Haddon added $2.8 million of invested capital in 2025 and earned less in total than it had the year before.
The company grew its sales and its invested capital in the same year that its profit fell, which means the growth it bought earned less than nothing.
Receivable Days
Formula. Accounts receivable divided by revenue, times 365.
Inputs. Accounts receivable from the balance sheet: $12.16 million in 2024 and $14.60 million in 2025. A note to the statements separates retainage, the share of each invoice builders withhold until a phase is complete: $2.08 million in 2024 and $3.10 million in 2025.
Result. 70 days in 2024 and 80 days in 2025. Excluding retainage, 58 days and 63 days.
Reading. Builders are paying more slowly, and retainage has grown faster than sales. Larger subdivision contracts with national builders tend to carry retainage clauses that the company's local custom builders never used. At 2025 sales, one more day of unpaid invoices locks up roughly $180,000.
Net Debt to EBITDA
Formula. Borrowings minus cash, over operating income with depreciation and amortization added back (EBITDA).
Inputs. Net debt of $7.87 million in 2024 and $8.90 million in 2025. EBITDA of $6.05 million and $5.66 million.
Result. 1.30 times in 2024 and 1.57 times in 2025.
Reading. Debt rose while earnings fell. The level is still comfortable against the bank's 3.50 times covenant, but the direction matters for any future expansion.
Interest Coverage
Formula. Operating income divided by interest expense.
Inputs. Interest of $640,000 in 2024 and $700,000 in 2025.
Result. 6.6 times in 2024 and 5.4 times in 2025.
Reading. Coverage remains adequate but is falling for the same two reasons: lower operating income and higher borrowing.
Reading the Five Together
The five measures tell one story. The company's growth came mainly from distant builders. That work earns thinner margins, probably because of freight; it ties up more cash in receivables and retainage; and the company has borrowed to carry that cash. Return on invested capital, already below the owners' hurdle, has fallen further. The answer to the owners' question is no: on current terms, the company cannot afford the growth it has been chasing without its finances weakening each year. Corporate finance texts note that a firm's sustainable growth depends on its return on capital and its financing policy together (Brealey et al., 2023), and Haddon's return is now too low to support its growth rate.
What the Ratios Cannot Show
Ratios show what happened, not why. They do not show whether distant jobs are unprofitable in themselves or only priced wrong, whether the receivable increase is temporary or whether a different way of serving distant builders would change the picture. The statement interpretation in Unit 3 takes up those questions.
References
Brealey, R. A., Myers, S. C., & Allen, F. (2023). Principles of corporate finance (14th ed.). McGraw Hill.
Koller, T., Goedhart, M., & Wessels, D. (2020). Valuation: Measuring and managing the value of companies (7th ed.). Wiley.
Penman, S. H. (2013). Financial statement analysis and security valuation (5th ed.). McGraw-Hill.
Reading the GM 506 Unit 2 instructions
In Unit 2 of GM506 you analyze a company's financial position with a small set of ratios chosen for one question. State the question in a sentence and explain why your measures, and not a longer list, answer it. For each ratio, give the formula, the inputs with the statement lines they come from, the result for each year and two or three sentences on what the change means. Include a return measure compared with the owners' required return, since growth that earns less than its cost destroys value. Where a note to the statements breaks out a figure that matters, such as retainage in receivables, use it. Then read the ratios together as one finding that answers the question. Close with what the ratios cannot show and what the next analysis should examine. Expect about four pages, citing a financial statement analysis text and a valuation source in APA 7.
How this GM506 Unit 2 example is built
The analysis opens with the owners' question and Penman's case for organizing ratios around how a business earns and is financed. Operating margin uses operating income of $4.25 million and $3.76 million. Return on invested capital uses after-tax operating income of $3.19 million and $2.82 million over invested capital of $32.5 million and $35.3 million, with Koller and colleagues on growth and returns, and the highlighted sentence links falling profit to rising capital. Receivable days use the balance sheet and the retainage note, showing 58 to 63 days excluding retainage and about $180,000 tied up per day. Net debt to EBITDA uses $7.87 million and $8.90 million of net debt against the bank's 3.50 covenant, and coverage uses $640,000 and $700,000 of interest. A joint reading answers no, citing Brealey, Myers and Allen on sustainable growth, and a closing section passes questions to Unit 3.
Where the points sit in the GM506 Unit 2 rubric
Points on this GM506 analysis go first to the choice of ratios and the link to the question. Instructors check that each formula is stated, the inputs are traced to statement lines and the arithmetic is correct. Comparing return on invested capital with the owners' hurdle is a central test, because it shows whether growth creates value. Using a statement note to refine a ratio, such as separating retainage, earns credit for close reading. The joint reading carries significant weight: five correct ratios that never add up to an answer leave the owners without guidance. Naming what the ratios cannot show demonstrates judgment about the limits of the method. The methods come from Penman's statement analysis book, the Koller valuation guide and the Brealey textbook, cited in APA 7.
GM506 Unit 2 help: mistakes that cost points
Many GM506 Unit 2 papers run through the whole ratio chapter and leave the reader hunting for the point. Choosing five for one question makes the analysis usable. Others report results without saying which statement lines the inputs came from, which makes them impossible to check. A frequent gap is omitting the comparison of return with the required return, so the paper never says whether growth is creating value. Some writers interpret each ratio in isolation and never connect them. Notes are often ignored, though they explain many changes. State the question, justify your measures, show formula, inputs and results for each year, compare returns with the hurdle, use the notes to refine any figure that needs it, read the ratios together as one answer and name what still needs explaining.
Get a GM506 Unit 2 example written to your instructions
Share the statements or case figures assigned for Unit 2, along with the prompt and grading rubric. A first ratio analysis on those figures costs nothing, arrives in 24-48h, and stays limited to the measures your question needs, each one computed from a labeled statement line and followed by what it means for the decision. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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GM506 Unit 2 questions, answered
What if the prompt lists specific ratios?
Then those come first, computed exactly as the prompt defines them. Where a listed ratio does little for the decision, the interpretation can say so briefly, and one additional measure the question does need can sit beside the required set. Assigned measures are rarely optional, but the reading of them is where the analysis shows judgment.
Where can I find a free GM506 Unit 2 sample paper?
This page carries a full GM506 Unit 2 ratio analysis of a truss manufacturer using five ratios over two years to test whether it can afford its growth, with formulas, inputs, a joint reading and APA 7 references.
Why compare return on invested capital with the hurdle rate?
Because growth adds value only when the return on the capital it uses exceeds what the owners require. Haddon's return fell to 8.0 percent against a 10.5 percent hurdle while its invested capital grew, so its growth was destroying value.
Why separate retainage in receivable days?
Retainage is the share of each invoice builders withhold until a phase is complete, and it follows contract terms rather than payment habits. Separating it showed that receivable days rose from 58 to 63 excluding retainage, while retainage itself grew faster than sales.
Which return measure suits a private manufacturer?
Return on invested capital, because it measures the business before financing and can be compared with the owners' hurdle across years with different debt levels. Return on equity still matters to owners but moves with how much the company borrows.