# lec4 - Lecture 4 page 1 RATIO ANALYSIS Purpose of Ratio...

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Lecture 4 page 1 RATIO ANALYSIS Purpose of Ratio Analysis: 1* To evaluate the firm’s financial performance. 2* To determine the strengths and weaknesses of past investment and financing decisions. Are assets being used efficiently? Is the firm operating in its optimal capital structure range? Capital- long term financing Are the firm’s receivables, payables, inventory, cash, etc. being managed efficiently? CLASSIFICATIONS OF RATIOS: 1. Profitability ratios 2. Asset management (turnover) ratios 3. Debt managment (long-term solvency) ratios 4. Liquidity (short-term solvency) ratios 5. Market value ratios In general. For balance sheet items, use annual average. End of the year + beginning 2 For income statement items, use the most recent. - Richard T. Bliss, Babson University and Terry D. Nixon, Miami University

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Lecture 4 page 2 Profitability Ratios (some examples): Profit margin on sales = Net income / sales Return on Equity (ROE) = net income/stockholders’ equity = EAT/stockholders’ equity Return on Assets (ROA) = net income/total assets =EAT/total assets Asset management (turnover) Ratios (some examples): Total Asset Turnover = Sales/Total assets e.g. TAT = 10 = 10/1 Inventory Turnover = Sales/Inventory DSO = Days sales outstanding = Average collection period = Accounts Receivable/(Annual (credit) Sales/365) = Accounts Receivable/Average sales per day Debt Management (long-term solvency) Ratios (some examples): Times Interest Earned ratio = Interest Coverage ratio = EBIT/Interest expense Debt ratio = Total Debt / Total Assets
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## This note was uploaded on 10/19/2011 for the course FINANCE 301 taught by Professor Nixon during the Fall '11 term at Miami University.

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lec4 - Lecture 4 page 1 RATIO ANALYSIS Purpose of Ratio...

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