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# Ch3 - Ch3.RatioAnalysis 1 IssuesinCh.3 Common-size...

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1 Ch 3. Ratio Analysis

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2 Issues in Ch.3 Common-size statements Financial ratio analysis Computation More importantly, interpretation Reading financial statements critically
3 Why Ratios? Absolute numbers do not carry much significant meanings Relative (or “scaled” or “standardized”) numbers provide more insights For example, suppose the company made net income of \$10 million last year. Is this good or bad? We don’t know it until we standardize \$10 million by say, total assets or sales revenue.

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4 Standardized Financial Statements Common-Size Balance Sheets Compute all accounts as a percent of total assets Common-Size Income Statements Compute all line items as a percent of sales Standardized statements make it easier to compare financial information, particularly as the company grows They are also useful for comparing companies of different sizes, particularly within the same industry
5 Common-size statements (Standardized statements)

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6 Common-size statements
7

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8 Financial Ratios Liquidity ratios Leverage ratios Asset management ratios Profitability ratios Market value ratios Du Pont Ratios
9 Using Bobcats Co.’s financial statements,  calculate financial ratios. Liquidity (short-term solvency) ratios: Measures the ease and quickness with which the assets can be converted into cash with little or no loss in value. Current ratio = CA / CL = 100,000 / 150,000 = .67 times Quick(Acid-test) ratio = (CA - Inv) / CL = (100,000 – 50,000) / 150,000 = .33 times

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10 Financial Ratios Long-term debt (leverage) ratios Total debt ratio = TD / TA = 350,000 / 650,000 = .54 times Debt-Equity ratio = TD / TE = 350,000 / 300,000 = 1.17 times Times interest earned (TIE) = EBIT / Int. Exp. = 200,000 / 10,000 = 20 times
11 Typically, financially troubled firms shows severe deterioration of liquidity and leverage ratios.

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12 Financial Ratios Asset management (turnover) ratios Inventory turnover = COGS / Inv = 400,000 / 50,000 = 8 times Days sales in inventory = 365 / Inventory turnover = 365 / 8 = 45.6 days
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Ch3 - Ch3.RatioAnalysis 1 IssuesinCh.3 Common-size...

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