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Unformatted text preview: tatements make it easier to compare
Standardized
financial information, particularly as the company grows
financial
They are also useful for comparing companies of different
They
sizes, particularly within the same industry
sizes, 9 Ratio Analysis Ratios also allow for better comparison through
Ratios
time or between companies
time
As we look at each ratio, ask yourself what the
As
ratio is trying to measure and why that
information is important
information
Ratios are used both internally and externally 10 Categories of Financial Ratios Shortterm solvency or liquidity ratios Longterm solvency or financial leverage
Longterm ratios
ratios Asset management or turnover ratios Profitability ratios Market value ratios 11 Computing Liquidity Ratios Current Ratio = CA / CL Quick Ratio = (CA – Inventory) / CL 696 / 1,995 = .35 times NWC to Total Assets = NWC / TA (2,256 – 301) / 1,995 = .98 times Cash Ratio = Cash / CL 2,256 / 1,995 = 1.13 times (2,256 – 1,995) / 5,394 = .05 Interval Measure = CA / average daily
Interval
operating costs
operating 2,256 / ((2,006 + 1,740)/365) = 219.8 days
12 Computing Longterm Solvency
Computing
Ratios
Ratios Total Debt Ratio = (TA – TE) / TA Debt/Equity = TD / TE (5,394 – 2,556) / 2,556 = 1.11 times Equity Multiplier = TA / TE = 1 + D/E (5,394 – 2,556) / 5,394 = 52.61% 1 + 1.11 = 2.11 Longterm debt ratio = LTD / (LTD + TE) 843 / (843 + 2,556) = 24.80%
13 Computing Coverage Ratios Times Interest Earned = EBIT / Interest 1,138 / 7 = 162.57 times Cash Coverage = (EBIT + Depreciation) /
Cash Interest
Interest (1,138 + 116) / 7 = 179.14 times 14 Computing Inventory Ratios Inventory Turnover = Cost of Goods Sold /
Inventory Inventory
Inventory 2,006 / 301 = 6.66 times Days’ Sales in Inventory = 365 / Inventory
Days’ Turnover
Turnover 365 / 6.66 = 55 days 15 Computing Receivables Ratios Receivables Turnover = Sales / Accounts
Receivables Receivable
Receivable 5,000 / 956 = 5.23 times Days’ Sales in Receivables = 365 /
Days’ Receivables Turnover
Receivables 365 / 5.23 = 70 days 16 Computing Total Asset Turnover Total Asset Turnover = Sales / Total Assets NWC Turnover = Sales / NWC 5,000 / 5,394 = .93
It is not unusual for TAT < 1, especially if a firm has a
It
large amount of fixed assets
large
5,000 / (2,256 – 1,995) = 19.16 times Fixed Asset Turnover = Sales / NFA 5,000 / 3,138 = 1.59 times 17 Computing Profitability
Computing
Measures
Measures Profit Margin = Net Income / Sales 689 / 5,000 = 13.78% Return on Assets (ROA) = Net Income /
Return Total Assets
Total 689 / 5,394 = 12.77% Return on Equity (ROE) = Net Income /
Return Total Equity
Total 689 / 2,556 = 26.96%
18 Computing Market Value
Computing
Measures
Measures Market Price = $87.65 per share Shares outstanding = 190.9 million PE Ratio = Price per share / Earnings per
PE share
share 87.65 / 3.61 = 24.28 times Markettobook ratio = market value per
Markettobook share / book value per share
share 87.65 / (2,556 / 190.9) = 6.55 times
19 Deriving...
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 Fall '09

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