ratiosfinal2 - Global Financial Markets Financial Statement...

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Global Financial Markets Financial Statement Analysis Module Developed By Ivan Brick John Longo Yaxuan Qi Department of Finance & Economics Summer, 2003 Learning Objectives - To retrieve financial data from S&P’s Research Insight software program. - To calculate and interpret financial ratios for a specific company. - To calculate and interpret financial ratios for a specific industry. - To conduct a “Dupont analysis” for a specific company. (Advanced students) Assignment Compute one or more of the ratios from each Ratio Group (see below) and analyze their results. Analysis should include the following: 1) Compare current values of each ratio for your selected firm vs. the current industry average of the corresponding ratio. - ( Example: Current P/E ratio of Microsoft = 25, while the current P/E ratio of the Software industry = 30) 2) Compare current values of each ratio for your selected firm vs. the 5-year average value of that ratio for your specific firm. - ( Example: Current P/E ratio of Microsoft = 25, while the 5-year average P/E ratio of Microsoft = 35) 3) Compare the current premium or discount valuation for each ratio of your selected firm vs. its historical relationship to the industry average. - ( Example: Over a 5 year period, Microsoft’s P/E ratio has historically traded at a 20% premium to the Software industry, while it is currently trading at a 20% discount to the Software industry.) 4) Determine an overall assessment of the financial health of your selected firm given your responses to 1) – 3). 5) Determine the drivers of Return on Equity (ROE) for a specific company using “Dupont Analysis” before completing your response to 4). (Advanced students) Note 1: Students may create their own industry average for each ratio by sorting on all firms with the same 4 digit SIC code, adding the results, and dividing by “n.”) Note 2 : Instructors should discuss their preferred methods for dealing with missing data, outliers and negative numbers. Ratio Groups 1
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- Liquidity Ratios - Activity or Management Efficiency Ratios - Leverage Ratios - Profitability Ratios - Market Price Ratios Classification scheme and ratios are adapted from the following: Bodie, Kane, Marcus, Investments , 5/e, McGraw-Hill, 2002. Liquidity Ratios 1) Current Ratio = (Current Assets / Current Liabilities) 2) Quick Ratio = (Current Assets – Inventory) / (Current Liabilities) Activity or Management Efficiency Ratios 1) Inventory Turnover = (Sales or Cost of Goods Sold / Inventory) 2) Total Asset Turnover = (Sales / Total Assets) 3) Average Collection Period = (Accounts Receivable / Sales Per Day) 4) Days to Sell Inventory = (Inventory / Sales Per Day) 5) Fixed Coverage Ratio = EBIT/ [Interest + Principal /(1-tax rate)] 6) Fixed Asset Turnover = Sales /Net Fixed Assets Leverage Ratios 1) Times Interest Earned = (Earnings Before Interest & Taxes / Interest Expense) 2) Total Debt to Total Assets = (Total Debt / Total Assets) 3) Total Debt to Equity = (Long Term Debt / Shareholders Equity)
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ratiosfinal2 - Global Financial Markets Financial Statement...

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