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Unformatted text preview: FINC 202 Lecture 11 (2009) Financial Ratios
One handout = “T31 Balance Sheet”
1 FINANCIAL ANALYSIS 1. Introduction • definition: The assessment of a firm’s past, present and anticipated financial condition. tools of financial analysis: • • historical/projected financial statements financial ratios management credit analysts, share/bond analysts users of financial analysis: 2 Why are ratios useful? • • Standardize numbers; facilitate comparisons Used to highlight weaknesses and strengths 3 2. Financial Ratio Analysis • Liquidity ratios Can the firm pay its debts? Has the firm sufficient cash or near cash to pay up now? Asset management ratios How effectively is the firm using its resources ? Right balance of assets for the level of sales?
4 • • Debt management ratios 1. 2. Right mix of debt and equity? How wellprotected are creditors in the event of liquidation ? 3. Can the firm meet its expected debtservicing commitments ? • 1. 2. Profitability ratios How profitable is the firm ? What is the percentage return on funds invested? 5 • Market value ratios 1. What is our feedback on what investors think of the liquidity, profitability etc ratios? 2. What do investors think of the firm’s past performance and future prospects ? 6 Task Task
For each slide furnishing the structure of a ratio: For each slide furnishing the structure of a ratio: • • Calculate the values of the ratio for the years 2008 and 2009. A blank slide is put in the lecture set where needed for these calculations. 7 Liquidity ratios current assets Current ratio = current liabilities current assets − inventory Quick ratio = current liabilities
8 Calculate D’Leon’s forecasted current Calculate and quick ratios for 2009. and CA CR01 = CL = QR01 = CA - Inv. CL =
9 Comments on CR and QR 2009 CR QR 2008 1.1x 0.4x 2007 2.3x 0.8x Ind. 2.7x 1.0x Expected to improve but still below the industry average. Liquidity position is weak. • Dangerous ___________________
10 10 Asset Management Ratios Accounts receivable: Days Sales Outstanding (DSO) Accounts Receivable DSO = Credit Sales 360 11 11 DSO is the average number of days after making a sale before receiving cash. Receivables DSO = Average sales per day
= Receivables Sales/360 =
12 12 Appraisal of DSO 2009 DSO 2008 39.0 2007 36.8 Ind. 32.0 • • D’Leon collects too slowly, and is getting worse. D’Leon has ________________________.
13 13 Inventory: Sales Inventory Turnover = Inventory 14 14 What is the inventory turnover ratio vs. What the industry average? the Sales Inv. turnover = Inventories = = 2009 Inv. T. 2008 4.5x 2007 4.8x Ind. 6.1x
15 15 Comments on Inventory Turnover • • • Inventory turnover is below industry average. D’Leon might have old inventory, or its control might be poor. No improvement is currently forecasted. 16 16 ICP : Inventory Collection Period Ratio • Another way of looking at how well inventory is being managed, is to see how long it takes to turn it into cash, on average. Inventory Inventory Collection Period = Sales 360 17 17 ICP Solution Inventory Collection Period = to nearest full day ≈ . 2009 ICP 2008 79days 2007 75days Ind. 60days approx
18 18 Fixed Assets & Total Assets: Sales Fixed asset turnover = Net Fixed Assets Sales Total Asset Turnover = Total Assets
19 19 F.A. and T.A. turnover vs. industry average Sales Fixed assets = Net fixed assets turnover = = Total assets = turnover = =
20 20 Sales Total assets 2009 FATO TATO 2008 6.2x 2.0x 2007 10.0x 2.3x Ind. 7.0x 2.6x • • FA turnover projected to exceed industry average. Good. TA turnover not up to industry average. Caused by excessive current assets 21 21 Debt Management Ratios Leverage ratios: Total Liabilities Debt Ratio = Total Assets 22 22 Calculate the Debt Ratio D = TA =
2009 D/TA . 2008 2007 Ind. 95.4% 54.8% 50.0%
23 23 Times Interest Earned Ratio Times Interest Earned Ratio EBIT TIE ratio = interest expense 24 24 Too much debt, but projected to improve Calculate the TIE ratio TIE = = = 2009 TIE 2008 -3.9x 2007 3.3x Ind. 6.2x
25 25 EBIT Int. expense EBITDA Coverage Ratio EBITDA + Lease pmts EBITDACov. = Interest + Lease pmts + principal pmts 26 26 Too much debt, but projected to improve EBITDA coverage = EBITDA + Lease payments (in cash) Interest Lease Loan Principal expense + pmt. + repayments = 2009 EBITDA coverage 2008 -3.3x = 2007 3.6x Ind. 8.0x
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This note was uploaded on 12/23/2009 for the course BCOM FINC 202 taught by Professor Warwickanderson during the Spring '09 term at Canterbury.
- Spring '09