WEEK 3 FINANCIAL RATIO ANALYSIS .ppt

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

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RATIO ANALYSIS RATIO ANALYSIS INSTRUCTOR: IRIS CHANG

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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
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 %

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Why Ratio Analysis? You use ratios every day. For example, unemployment rate, pay raise, interest rate, inflation rate, etc.
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.

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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
CURRENT RATIO Measures short-term debt-paying ability Current ratio = Current assets Current liabilities

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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.
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

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

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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
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

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• Fall '16
• Jane
• Generally Accepted Accounting Principles, Goods Sold

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