WEEK 3 FINANCIAL RATIO ANALYSIS .ppt

WEEK 3 FINANCIAL RATIO ANALYSIS .ppt - RATIO ANALYSIS...

This preview shows page 1 - 14 out of 72 pages.

RATIO ANALYSIS RATIO ANALYSIS INSTRUCTOR: IRIS CHANG
Image of page 1

Subscribe to view the full document.

HORIZONTAL ANALYSIS 127% 121% 119% 112% 100% ANY COMPANY INC. Net Sales For the Year Ended December 31 (in millions) 2003 2002 2001 2000 1999 $ 6,562.8 $ 6,295.4 $ 6,190.6 $ 5,786.6 $ 5,181.4 Change since base period
Image of page 2
VERTICAL ANALYSIS Expresses each item in a financial statement as a percent of a base amount (total assets or net sales) ANY COMPANY, INC. Condensed Balance Sheets (Partial) December 31 (in millions) 2002 2001 . Assets Amount Percent Amount Percent Current assets $1,496.5 29.6% $1,467.7 30.1% Capital assets 2,888.8 57.2% 2,733.3 56.9% Other assets 666.2 13.2% 636.6 13.0% Total assets $5,051.5 100.0 % $4,837.6 100.0 %
Image of page 3

Subscribe to view the full document.

Why Ratio Analysis? You use ratios every day. For example, unemployment rate, pay raise, interest rate, inflation rate, etc.
Image of page 4
Ratio Analysis Is a method or process by which the relationship of items or groups of items in the financial statements are computed, and presented. Is an important tool of financial analysis. Is used to interpret the financial statements so that the strenghs and weaknesses of a company and its performance can be determined.
Image of page 5

Subscribe to view the full document.

Ratios Analysis 1 Liquidity Ratios Measure a firm’s ability to meet its current obligations 2 Profitability Ratios Measure financial performance of a firm. 3 Asset Manageme nt Ratios Measure a firm’s efficiency in utilizing its assets 4 Market Ratios Measure returns for investors
Image of page 6
CURRENT RATIO Measures short-term debt-paying ability Current ratio = Current assets Current liabilities
Image of page 7

Subscribe to view the full document.

Liquidity Ratios Current Ratio Generally Accepted Standard: Current assets should be 2 times or 200% of current liabilities. Low Ratio: a company may not be able to pay off bills as rapidly as it should. High Ratio: money that could be working for the business is used in short- term and safe investments such as cash savings.
Image of page 8
Liquidity Ratios – Current Ratio ASSETS LIABILITIES Current Assets Current Liabilities Cash $20,000 Accounts Payable $15,000 Accounts Receivable 80,000 Wages Payable $65,000 Inventory 200,000 Current Portion of Long-term Debt $50,000 Total Current Assets $300,000 Total Current Liabilities $130,000 Fixed Assets Long-term Liabilities Land $200,000 Bank Loan 100,000 Equipment 100,000 Long-term Bonds 100,000 Furniture & Fixtures 100,000 Total Liabilities 330,000 Total Fixed Assets $400,000 Common Stock (Equity) 370,000 Total Assets $700,000 Total Liabilities and Equity 700,000
Image of page 9

Subscribe to view the full document.

QUICK RATIO Measures immediate short-term debt- paying ability Quick Ratio = Cash + accounts receivables Current liabilities
Image of page 10
QUICK RATIO Measures immediate short-term debt- paying ability Quick Ratio = Cash + accounts receivables Current liabilities 20,000 + 80,000 = ------------------- = 77 % 130,000
Image of page 11

Subscribe to view the full document.

Liquidity Ratios – Quick Ratio ASSETS LIABILITIES Current Assets Current Liabilities Cash $20,000 Accounts Payable $15,000 Accounts Receivable 80,000 Wages Payable $65,000 Inventory 200,000 Current Portion of Long-term Debt $50,000 Total Current Assets $300,000 Total Current Liabilities $130,000 Fixed Assets Long-term Liabilities Land $200,000 Bank Loan 100,000 Equipment 100,000 Long-term Bonds 100,000 Furniture & Fixtures 100,000 Total Liabilities 330,000 Total Fixed Assets $400,000 Common Stock (Equity) 370,000 Total Assets $700,000 Total Liabilities and Equity 700,000
Image of page 12
Turnover of Cash Ratio Measures: measures the ability of a company to turn its cash (or working capital) into sales revenue. Maintaining a positive cash flow or
Image of page 13

Subscribe to view the full document.

Image of page 14
  • Fall '16
  • Jane
  • Generally Accepted Accounting Principles, Goods Sold

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern