Assume that Fixed Assets Total Assets Current Assets Note that Net Fixed Assets

Assume that fixed assets total assets current assets

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(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
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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
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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
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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
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DuPont Formula 𝑅𝑅𝑅𝑅𝑅𝑅 = 𝑁𝑁𝐶𝐶𝐶𝐶𝐼𝐼𝐶𝐶𝐴𝐴 𝑆𝑆𝑅𝑅𝐿𝐿𝐶𝐶𝐴𝐴 𝑆𝑆𝑅𝑅𝐿𝐿𝐶𝐶𝐴𝐴 𝐴𝐴𝑅𝑅𝐶𝐶𝐴𝐴𝐴𝐴𝐴𝐴𝐶𝐶𝐶𝐶𝐴𝐴 𝐴𝐴𝑅𝑅𝐶𝐶𝐴𝐴𝐴𝐴𝐴𝐴𝐶𝐶𝐶𝐶𝐴𝐴 𝐴𝐴𝑅𝑅𝐶𝐶𝑅𝑅𝑇𝑇𝐶𝐶𝑅𝑅𝐶𝐶𝐼𝐼 = 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑇𝑇𝑇𝑇𝑁𝑁𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑁𝑁𝑇𝑇 𝑅𝑅𝑅𝑅𝑅𝑅 = 𝑁𝑁𝑁𝑁𝑁𝑁 ∗ 𝐴𝐴𝐴𝐴𝐴𝐴 ∗ 𝑅𝑅𝑇𝑇𝐶𝐶 . 𝑁𝑁𝐶𝐶𝐿𝐿𝐶𝐶𝑅𝑅𝑀𝑀𝐿𝐿𝑅𝑅𝐶𝐶𝐶𝐶 FIN 300 - Fin Ratios 23
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DuPont Formula 𝑅𝑅𝑅𝑅𝑅𝑅 = 𝑁𝑁𝐶𝐶𝐶𝐶𝐼𝐼𝐶𝐶𝐴𝐴 𝑆𝑆𝑅𝑅𝐿𝐿𝐶𝐶𝐴𝐴 𝑆𝑆𝑅𝑅𝐿𝐿𝐶𝐶𝐴𝐴 𝐴𝐴𝑅𝑅𝐶𝐶𝐴𝐴𝐴𝐴𝐴𝐴𝐶𝐶𝐶𝐶𝐴𝐴 𝐴𝐴𝑅𝑅𝐶𝐶𝐴𝐴𝐴𝐴𝐴𝐴𝐶𝐶𝐶𝐶𝐴𝐴 𝐴𝐴𝑅𝑅𝐶𝐶𝑅𝑅𝑇𝑇𝐶𝐶𝑅𝑅𝐶𝐶𝐼𝐼 = 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑇𝑇𝑇𝑇𝑁𝑁𝑇𝑇𝑇𝑇𝑇𝑇𝑁𝑁𝑁𝑁𝑇𝑇 𝑇𝑇𝑇𝑇𝑁𝑁𝑇𝑇𝑇𝑇𝑇𝑇𝑁𝑁𝑁𝑁𝑇𝑇 𝑇𝑇𝑇𝑇𝑁𝑁𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑁𝑁𝑇𝑇 = 𝑅𝑅𝑅𝑅𝐴𝐴 𝑥𝑥 𝑅𝑅𝑇𝑇𝐶𝐶𝑅𝑅𝐶𝐶𝐼𝐼 𝑁𝑁𝐶𝐶𝐿𝐿𝐶𝐶𝑅𝑅𝑀𝑀𝐿𝐿𝑅𝑅𝐶𝐶𝐶𝐶 FIN 300 - Fin Ratios 24
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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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