Looking at the current ratio for the overall group

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Unformatted text preview: ystem, without permission in writing from RMA. Looking at the current ratio for the overall group for the most recent year (third column from the left in Table 3.9), we see that three numbers are reported. The one in the middle, 2.5, is the median, meaning that half of the 326 firms had current ratios that were lower and half had bigger current ratios. The other two numbers are the upper and lower quartiles. So, 25 percent of the firms had a current ratio larger than 3.9 and 25 percent had a current ratio smaller than 1.6. Our value of 2 falls comfortably within these bounds, so it doesn’t appear too unusual. This comparison illustrates how knowledge of the range of ratios is important in addition to knowledge of the average. Notice how stable the current ratio has been for the last three years. EXAMPLE 3.4 More Ratios Take a look at the most recent numbers reported for Sales/Receivables and EBIT/Interest in Table 3.9. What are the overall median values? What are these ratios? If you look back at our discussion, you will see that these are the receivables turnover and the times interest earned, or TIE, ratios. The median value for receivables turnover for the entire group is 28.6 times. So, the days in receivables would be 365/28.6 13, which is the bold-faced number reported. The median for the TIE is 3.0 times. The number in parentheses indicates that the calculation is meaningful for, and therefore based on, only 304 of the 326 companies. In this case, the reason is that only 304 companies paid any significant amount of interest. 64 PART 1 Overview ros82361_ch03.indd 64 7/7/08 8:30:13 PM Confirming Pages There are many sources of ratio information in addition to the one we examine here. For example, www.reuters.com shows a variety of ratios for publicly traded companies. Below we show the profitability (called “Management Effectiveness” on this Web site) ratios for Johnson & Johnson. Management Effectiveness Company Return On Assets (TTM) Return On Assets - 5 Yr. Avg. 15.60 16.86 Industry 10.47 11.63 Sector 7.04 6.94 S&P 500 8.39 7.10 Return On Investment (TTM) Return On Investment - 5 Yr. Avg. 20.25 22.62 13.51 15.96 9.31 9.99 12.39 10.67 Return On Equity (TTM) Return On Equity - 5 Yr. Avg. 25.24 28.37 20.36 24.85 14.69 16.84 21.38 18.52 In looking at numbers such as these, recall our caution about analyzing ratios that you don’t calculate yourself: Different sources frequently do their calculations somewhat differently, even if the ratio names are the same. Problems with Financial Statement Analysis We continue our chapter on financial statements by discussing some additional problems that can arise in using financial statements. In one way or another, the basic problem with financial statement analysis is that there is no underlying theory to help us identify which quantities to look at and to guide us in establishing benchmarks. As we discuss in other chapters, there are many cases in which financial theory and economic logic provide gui...
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This note was uploaded on 10/28/2009 for the course FINA 505 taught by Professor Deborahcernauskas during the Summer '09 term at Northern Illinois University.

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