Case Finance Analysis - Cooperative Extension Colorado...

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Gross Profit Margin Gross Profit Sales Operating Profit Margin Earnings Before Interest and Taxes Sales Net Profit Margin Net Income Sales Return on Assets Net Income Total Assets Return on Equity Net Income Common Equity Colorado State University and U.S. Department of Agriculture cooperating. Cooperative Extension programs are available to all without discrimination. YOU CAN’T ANALYZE A BOOK BY ITS COVER Cooperative Extension, Colorado State University Department of Agricultural and Resource Economics, Fort Collins, CO 80523-1172 October/No. 98-01 Financial Ratios: What They Say About Your Business by Sue Hine and Dawn Thilmany Agribusiness Economists Department of Agricultural and Resource Economics Although financial ratios cannot tell a complete story about a business, they can help direct you toward key issues facing your individual firm or one for which you work. Understanding your financial statements can be an important first step toward improving or continuing a successful business operation. In the first part of this fact sheet, we will present some important financial ratios, show how they are calculated, and discuss what they mean. Next we will demonstrate how these ratios can be used to tell a story about your business. Finally we will help to show you how to use your financial story in a proactive manner when approaching your banker. Profitability Ratios: Profitability ratios are key to the firm’s success. They provide information about cash flow potential, repayment capacity, and perhaps most importantly, they contribute to the overall wealth of the firm. Remember, it is not the goal of the firm to just maximize profits; rather, the firm should be concerned about maximizing the firm’s overall wealth. Whether a firm remains viable depends on many factors, the most important of which is overall performance and wealth. Profits represent only one part of this equation, albeit an obviously important one. Each one of these ratios is looking at the sales generated by the firm in a different manner. For example, suppose that the net profit margin is 9 percent. Basically for every one dollar of sales, 9 cents is being generated in net income. If the earnings before interest and taxes ratio is 25 percent then operations are generating 25 cents for every dollar. Each profitability ratio is interpreted in
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Current Ratio Current Assets Current Liabilities Quick Ratio Current Assets Less Inventory Current Liabilities Debt to Total Assets Ratio Total Debt Total Assets Debt to Equity Total Debt Equity Times Interest Earned Earnings Before Interest and Taxes Interest Expense Average Collection Period Accounts Receivable Average Daily Credit Sales Inventory Turnover Sales Inventory Total Asset Turnover Sales Total Assets 2 this same manner. The rate of return ratios relate to how much profit is created by the total capital and/or the capital owners have
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This note was uploaded on 02/28/2011 for the course FIN 101 taught by Professor Collinhaime during the Spring '11 term at Vancouver Island University.

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Case Finance Analysis - Cooperative Extension Colorado...

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