Interest tax shield = cash generated from reduction in amt of taxes paid due to tax deductibility of interest Income Statement Net Sales 100 Less: COGS (20 ) Less: Depreciation (10 ) EBIT 70 Less: Interest Paid (20 ) Taxable Income 50 Less: Taxes (10 ) Net Income 40 Dividends 10 Addition to RE 30 Common-size B/S – as a % of total assets; Common-size I/S – all line items as a % of sales. Liquidity Ratios: measure ability to pay liabilities in the short run (ability to convert assets to cash quickly without a significant loss in value) Current Ratio : Current Assets/Current Liabilities Quick Ratio: Current Assets – Inventory / Current Liabilities Cash Ratio: Cash / Current Liabilities NWC to TA Ratio: Net Working Capital / TA Interval Measure: Current Assets / Average daily operating costs - (how many days of operations can the current assets fund) Long Term Solvency Ratios (Financial Leverage): extent of relying on debt financing rather than equity. More debt means more likely to default Total Debt Ratio: Total Debt / TA Debt Equity Ratio = Total Debt / TE Equity Multiplier Ratio = TA / TE = DE-ratio +1 Long Term Debt Ratio = Long Term Debt/Long Term Debt + TE Times Interest Earned Ratio = EBIT / Interest (given what I earn, how much can it cover my interests payable) Cash Coverage Ratio = EBIT + Depreciation / Interest Asset Management Ratios: measure how effectively assets are managed Inv Turnover: COGS/Inventory Days Sales in Inventory: 365/Inventory Turnover = 365XInventory/COGS (no. of days taken to sell that ‘set’ of inventory) Receivables Turnover: Sales/Receivables Days Sales Outstanding: AR/Avg Daily Sales = 365/Receivables turnover (number of days after making sales before receiving cash) Fixed Asset Turnover: Sales/Net Fixed Assets (for every $ of fixed asset, how much sales can it generate) Total Asset Turnover: Sales/TA Profitability Ratios: measures how successful a business is in earning returns on its investments. Combined effects of liquidity asset mgt & debts. Profit Margin = Net Income/Sales Basic Earning Power = EBIT/TA ROA = NI / TA ROE = NI (-preferred dividends) / TE o ROA is lowered by debt – interest expense lowers net income which also lowers ROA o ROE increases with debt o ROE does not consider risk & amount of capital invested Mkt Value Ratios: relate firms stock price to earnings, cash flow & book values P/E Ratio: Price/Earnings how much investors are willing to pay for $1 of earnings M/B Ratio: Mkt Price per share/Book Value per share how much investors are willing to pay for $1 of book value equity Profit Margin: measure of firm’s operating efficiency – how well does it control costs TA Turnover: measure of firm’s asset use efficiency – how well does it manage its assets.
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- Spring '11
- Generally Accepted Accounting Principles