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
- tohmunheng
- Generally Accepted Accounting Principles