(Assume that Fixed Assets = Total Assets – Current
Assets)
–
Note that “Net” Fixed Assets is what counts
toward total assets…normally, “net fixed” assets is
“gross fixed” minus accumulated depreciation
FIN 300 - Fin Ratios
19

Leverage/Debt Level
•
Debt Ratio (Debt/Total Assets)
•
Debt-to-Equity (D/E) ratio
•
Equity Multiplier (aka. “Leverage Ratio”)
•
Times Interest Earned (TIE)
–
aka. “Interest coverage”
•
Cash Coverage
FIN 300 - Fin Ratios
20

Leverage/Debt Ratios
•
Debt Ratio = (Total) Debt/(Total) Assets
•
Debt-to-Equity = (Total) Debt/(Total) Equity
•
Equity Multiplier (aka. “leverage ratio”)
= (Total) Assets/(Total) Equity
•
Times Interest Earned (TIE)
= EBIT/Interest Expense
•
Cash Coverage
= EBITDA/Interest Expense
FIN 300 - Fin Ratios
21

DuPont Formulas
•
ROE (return to the owners of the business) is a
function of 3 things:
–
(Net) Profit Margin
–
(Total) Asset Turnover
–
Leverage Ratio or, Equity Multiplier
•
Note ROE is an “accounting return”
–
Uses Net Income and “Book” equity
–
Does not use stock market values, etc.
FIN 300 - Fin Ratios
22

DuPont Formula
𝑅𝑅𝑅𝑅𝑅𝑅
=
𝑁𝑁𝐶𝐶𝐶𝐶𝐼𝐼𝐶𝐶𝐴𝐴
𝑆𝑆𝑅𝑅𝐿𝐿𝐶𝐶𝐴𝐴
𝑆𝑆𝑅𝑅𝐿𝐿𝐶𝐶𝐴𝐴
𝐴𝐴𝑅𝑅𝐶𝐶𝐴𝐴𝐴𝐴𝐴𝐴𝐶𝐶𝐶𝐶𝐴𝐴
𝐴𝐴𝑅𝑅𝐶𝐶𝐴𝐴𝐴𝐴𝐴𝐴𝐶𝐶𝐶𝐶𝐴𝐴
𝐴𝐴𝑅𝑅𝐶𝐶𝑅𝑅𝑇𝑇𝐶𝐶𝑅𝑅𝐶𝐶𝐼𝐼
=
𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁
𝑇𝑇𝑇𝑇𝑁𝑁𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑁𝑁𝑇𝑇
𝑅𝑅𝑅𝑅𝑅𝑅
=
𝑁𝑁𝑁𝑁𝑁𝑁 ∗ 𝐴𝐴𝐴𝐴𝐴𝐴 ∗ 𝑅𝑅𝑇𝑇𝐶𝐶
.
𝑁𝑁𝐶𝐶𝐿𝐿𝐶𝐶𝑅𝑅𝑀𝑀𝐿𝐿𝑅𝑅𝐶𝐶𝐶𝐶
FIN 300 - Fin Ratios
23

DuPont Formula
𝑅𝑅𝑅𝑅𝑅𝑅
=
𝑁𝑁𝐶𝐶𝐶𝐶𝐼𝐼𝐶𝐶𝐴𝐴
𝑆𝑆𝑅𝑅𝐿𝐿𝐶𝐶𝐴𝐴
𝑆𝑆𝑅𝑅𝐿𝐿𝐶𝐶𝐴𝐴
𝐴𝐴𝑅𝑅𝐶𝐶𝐴𝐴𝐴𝐴𝐴𝐴𝐶𝐶𝐶𝐶𝐴𝐴
𝐴𝐴𝑅𝑅𝐶𝐶𝐴𝐴𝐴𝐴𝐴𝐴𝐶𝐶𝐶𝐶𝐴𝐴
𝐴𝐴𝑅𝑅𝐶𝐶𝑅𝑅𝑇𝑇𝐶𝐶𝑅𝑅𝐶𝐶𝐼𝐼
=
𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁
𝑇𝑇𝑇𝑇𝑁𝑁𝑇𝑇𝑇𝑇𝑇𝑇𝑁𝑁𝑁𝑁𝑇𝑇
𝑇𝑇𝑇𝑇𝑁𝑁𝑇𝑇𝑇𝑇𝑇𝑇𝑁𝑁𝑁𝑁𝑇𝑇
𝑇𝑇𝑇𝑇𝑁𝑁𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑁𝑁𝑇𝑇
=
𝑅𝑅𝑅𝑅𝐴𝐴 𝑥𝑥 𝑅𝑅𝑇𝑇𝐶𝐶𝑅𝑅𝐶𝐶𝐼𝐼 𝑁𝑁𝐶𝐶𝐿𝐿𝐶𝐶𝑅𝑅𝑀𝑀𝐿𝐿𝑅𝑅𝐶𝐶𝐶𝐶
FIN 300 - Fin Ratios
24

Preferred Stock
•
For financial ratios, treat preferred stock as a
“debt” obligation – this is standard practice
–
Use “net income available to common”
•
Equals net income minus preferred dividends
–
Affects NPM, ROE, ROA, D/E, D/A, A/E (equity
multiplier), etc.

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- Fall '08
- Olander
- Balance Sheet, Corporate Finance, Debt, Leverage, Liquidity, Generally Accepted Accounting Principles, Fin Ratios