Session 3-Ratios

Session 3-Ratios - WhattoDowithAllThoseAccountingNumbers...

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What to Do with All Those Accounting Numbers
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Thursday, September 17 Tanner Building – West   11:00 AM – 12:00 PM Private Equity Grant McQueen W208 Venture Capital Hal Heaton W210 Female Investment Professionals Whitney Johnson W308 Investment Management & Hedge Funds Steve Thorley W242 Professional Panels for Students Mingle With Panelists 12:00 PM – 12:20 PM   Investment Banking & Capital Markets Mike Pinegar W240
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Warren Buffett, Bill Child and RC Willey
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Financial Ratios Financial Ratios Tools that help us determine the  financial health of a firm. We can compare a firm’s financial ratios  with its ratios in previous years (trend  analysis).  (trend a We can compare a firm’s financial ratios  with those of its industry (cross-sectional  analysis).
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Liquidity Efficient use of Assets Leverage (financing) Profitability
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Current Ratio  =  curr. assets / curr. liab. Quick Ratio = (curr. assets-inv)/curr liab Average Collection Period =                                               accounts rec./daily credit sales A/R Turnover = credit sales/accounts rec. Inventory Turnover  = COGS/inventory                                   
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Total Asset Turnover  = sales/total assets Fixed Asset Turnover  = sales/fixed assets Oper. Income ROI = oper. inc./total assets (also used as a profitability ratio)
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Debt Ratio = total debt/total assets Times Int. Earned= EBIT/interest exp. Also defined: (EBIT+depr)/interest Exp We’ll use book definition: EBIT/ Int Exp
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Return on Assets = net inc/total assets Return on Equity = net inc/total equity Gross Margin = gross profit/sales Operating Margin = EBIT/sales Net Margin = net income/sales
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Many involve stock price Some involve number of shares Think of how many permutations and  combinations you can think of! And you can combine them together for  additional insights Example: DuPont  Decomposition ROE = Net Prof. Mar. x Asset T/O x Leverage Mult.
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Comparison groups - Many sources of comparable data - Data is only as good as the skill of the analyst Time-series Look at firm for the last 5 years Project trends for the next 3 years Useful for  Boards of directors Executive incentive programs Loan covenants Regulators Rating Agencies
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Timing of data (beware of seasonality, major  events, one-time occurrences, partial year) Accounting data (effects of accruals) “Red flag” only!
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This note was uploaded on 04/05/2012 for the course BUS M 301 taught by Professor Jimbrau during the Fall '11 term at BYU.

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Session 3-Ratios - WhattoDowithAllThoseAccountingNumbers...

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