income statement items by net sales More difficult to be useful for the

Income statement items by net sales more difficult to

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income statement items by net sales) More difficult to be useful for the statement of cash flows Example of Vertical Analysis Ratio Analysis - Used in assessing Liquidity Does this firm have the ability to pay its bills in the short run? Profitability How well does this company generate profits? Solvency Is this company positioned to survive for the long run? Operations How effectively are managers using company resources? Marketability
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How does the market value the stock in this company? Liquidity Analysis - The purpose is determine if the company appears able to pay its bills in the short run. Commonly used liquidity ratios: Current Ratio = Current Assets / Current Liabilities Quick Ratio = Quick Assets / Current Liabilities **Quick assets = Cash + short-term securities + accounts receivable) Working Capital = Current Assets – Current Liabilities Net Working Capital Ratio = Working Capital / Total Assets Profitability Analysis - To assess the ability to generate income Common Ratios: Return on Assets = Net Income/Total Assets Return on Equity = Net Income/*Avg. Stockholders’ Equity *Avg SE = (Beg SE + End SE) / 2 Profit Margin = Net Income / Sales Earnings per share = Net income – preferred dividends / Avg # Common Shares Outstanding Avg Shares Outstanding = (Beg OS Shares + End OS Shares) ./2 (Average number of shares outstanding computation may need to be more complex if number of OS shares changes a great deal) Solvency Analysis Ratios - to assess a company’s ability to pay its bills in the long run Common Ratios: Debt to Equity = Total debt / Total SH Equity Interest Coverage = Income before interest & tax expenses / interest expense I Activity Analysis Ratios (Operating Effectiveness) - To assess how management is using company resources Common ratios: Asset turnover = Sales Revenue / Average Total Assets* *(Avg’ Total Assets = (Beg Assets+ End Assets) / 2) A Rec Turnover = Sales/Average Accounts Receivable** (Average Acct Rec = (Beg AR+ End AR) / 2) Inventory Turnover = Cost of Goods Sold/ Average Inventories*** ***(Average Inventory = (Beg Inv + End Inv) / 2) Market Ratios - To assess how the market values the company
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Common Ratios: Price Earnings = Market Price of Common Stock/ Earnings Per Share Market to Book = Market Price of Common Stock / Book Value per Common Share* *(Stockholders’ Equity – Preferred Equity) / # Common Shares Dividend Yield = Annual Dividends per Common Share / Market Price of Common Share Dividend Payout = Cash Dividends/ Net Income Analysis of the Footnotes Read the pages of footnotes for each company for both years of analysis. Search for off-balance sheet financing (liabilities that are not on the balance sheet) Learn about accounting methods and many other items.
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