Fin Notes 9-11

Fin Notes 9-11 - Profit after Taxes * Sales Sales Assets Or...

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Fin Notes 9-11 I. Objectives of ratio analysis - To evaluate a firm’s ongoing success. We are going to do that by: 1) compare with past ratios 2) compare our ratios with those of the competition. Balance Sheet: Assets = Liabilities “return generating assets” How you finance these (how you make $) Return on Investment = is the most popular of all ratios. - Forbes Fortune rank firms by profitability - Target ROI’s are used for bonuses - Utility rates are based on them. II. Definition ROI = Profit after taxes Some measure of investment Investment may be measued by a. Assets Profit after tax (PAT) Asset (debt + Equity) b. Stockholders’ equity (higher number) PAT Equity III. Analysis- returns on assets or ROA For purposes of analysis ROI is frequently broken down into the product of two ratios:
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Unformatted text preview: Profit after Taxes * Sales Sales Assets Or Profitability * Efficiency Profit Margin * Asset Turnover ratio = ROA HIGH LOW LOW HIGH AVE AVE-Discuss the reasons: high profit margin indicates a lack of competition a barrier to entry. EXAMPLES: A PAT, High Tech, High Research and Develop area All of these imply a High Capital Investment. ~ you can make money 3 ways 1> Profitability 2> Efficiency 3> Leverage- how much debt is used to finance the company ROE= Profit after taxes * Sales * Assets Sales Assets Equity Or = Profit Margin * Turnover * Equity Multiplier EXAMPLE: Ferguson 4.339% * 2.07 / 9.08 = 2.364 = ROE = 21.47% Risk- Return Relationships What determines how large the ROI for a particular company....
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Fin Notes 9-11 - Profit after Taxes * Sales Sales Assets Or...

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