Description
Ratio
The Analysis of Financial Statements
The
Use Of Financial Ratios Analyzing Liquidity Analyzing Activity Analyzing Debt Analyzing Profitability A Complete Ratio Analysis
2
The Analysis of Financial Statements
THE
USE OF FINANCIAL RATIOS
± Financial Ratio are used as a relative measure that facilitates the evaluation of efficiency or condition of a particular aspect of a firm's operations and status ± Ratio Analysis involves methods of calculating and interpreting financial ratios in order to assess a firm's performance and status
3
Example
(1) (2) (1)/(2) 1.10 .92
Year End Current Assets/Current Liab. Current Ratio
1994 1995
$550,000 /$500,000 $550,000 /$600,000
Copyright
¥1994, HarperCollins Publishers
Interested Parties
4
Three sets of parties are interested in ratio analysis:
Shareholders Creditors Management
Copyright ¥1994, HarperCollins Publishers
Types of Ratio Comparisons
5
There are two types of ratio comparisons that can be made:
Cross-Sectional
Analysis Time-Series Analysis
± Combined Analysis uses both types of analysis to assess a firm's trends versus its competitors or the industry
Copyright ¥1994, HarperCollins Publishers
6
Words of Caution Regarding Ratio Analysis
A
single ratio rarely tells enough to make a sound judgment. Financial statements used in ratio analysis must be from similar points in time. Audited financial statements are more reliable than unaudited statements. The financial data used to compute ratios must be developed in the same manner. Inflation can distort comparisons.
Copyright ¥1994, HarperCollins Publishers
Groups of Financial Ratios
7
Liquidity Activity Debt Profitability
Copyright ¥1994, HarperCollins Publishers
8
Analyzing Liquidity
Liquidity
refers to the solvency of the firm's overall financial position, i.e. a "liquid firm" is one that can easily meet its short-term obligations as they come due. A second meaning includes the concept of converting an asset into cash with little or no loss in value.
Copyright ¥1994, HarperCollins Publishers
Three Important Liquidity Measures
9
Net Working Capital (NWC) NWC = Current Assets - Current Liabilities Current Ratio (CR) Current Assets CR = Current Liabilities Quick (Acid-Test) Ratio (QR) Current Assets - Inventory QR = Current Liabilities
Copyright
¥1994, HarperCollins Publishers
Analyzing Activity
10
Activity
is a more sophisticated analysis of a firm's liquidity, evaluating the speed with which certain accounts are converted into sales or cash; also measures a firm's efficiency
Copyright ¥1994, HarperCollins Publishers
Five Important Activity Measures
11
Inventory Turnover (IT)
IT =
Cost of Goods Sold Inventory Accounts Receivable
Average Collection Period (ACP)
ACP =
Annual Sales/360 Accounts Payable
Average Payment Period (APP)
APP= Annual Purchases/360 Sales
Fixed Asset Turnover (FAT)
FAT =
Net Fixed Assets Sales Total Assets
Total Asset Turnover (TAT)
TAT =
12
Analyzing Debt
Debt
is a true "double-edged" sword as it allows for the generation of profits with the use of other people's (creditors) money, but creates claims on earnings with a higher priority than those of the firm's owners. Financial Leverage is a term used to describe the magnification of risk and return resulting from the use of fixed-cost financing such as debt and preferred stock.
¥Prof. Kuhle
Measures of Debt
13
There
are Two General Types of Debt Measures ±Degree of Indebtedness ±Ability to Service Debts
Four Important Debt Measures
14
Debt Ratio (DR) Debt-Equity Ratio (DER) Times Interest Earned Ratio (TIE) Fixed Payment Coverage Ratio (FPC)
DR=
Total Liabilities Total Assets Long-Term Debt
DER=
Stockholders· Equity
Earnings Before Interest & Taxes (EBIT) TIE= Interest Earnings Before Interest & Taxes + Lease Payments FPC= Interest + Lease Payments +{(Principal Payments + Preferred Stock Dividends) X [1 / (1 -T)]}
Analyzing Profitability
15
± Profitability Measures assess the firm's ability to operate efficiently and are of concern to owners, creditors, and management ± A Common-Size Income Statement, which expresses each income statement item as a percentage of sales, allows for easy evaluation of the firm¶s profitability relative to sales.
Seven Basic Profitability Measures
16
Gross Profit Margin (GPM) Operating Profit Margin (OPM) Net Profit Margin (NPM) Return on Total Assets (ROA) Return On Equity (ROE) Earnings Per Share (EPS) Price/Earnings (P/E) Ratio
GPM=
Gross Profits Sales Operating Profits (EBIT)
OPM =
Sales Net Profit After Taxes
NPM= ROA= ROE=
Sales Net Profit After Taxes Total Assets Net Profit After Taxes Stockholders· Equity Earnings Available for Common Stockholder·s Number of Shares of Common Stock Outstanding Market Price Per Share of Common Stock Earnings Per Share
EPS =
P/E =
A Complete Ratio Analysis
17
DuPont
System of Analysis
± DuPont System of Analysis is an integrative approach used to dissect a firm's financial statements and assess its financial condition ± It ties together the income statement and balance sheet to determine two summary measures of profitability, namely ROA and ROE
DuPont System of Analysis
18
The
firm's return is broken into three components: ± A profitability measure (net profit margin) ± An efficiency measure(total asset turnover) ± A leverage measure (financial leverage
multiplier)
Summarizing All Ratios
19
An
approach that views all aspects of the firm's activities to isolate key areas of concern Comparisons are made to industry standards (cross-sectional analysis) Comparisons to the firm itself over time are also made (time-series analysis)
doc_192570927.ppt
Ratio
The Analysis of Financial Statements
The
Use Of Financial Ratios Analyzing Liquidity Analyzing Activity Analyzing Debt Analyzing Profitability A Complete Ratio Analysis
2
The Analysis of Financial Statements
THE
USE OF FINANCIAL RATIOS
± Financial Ratio are used as a relative measure that facilitates the evaluation of efficiency or condition of a particular aspect of a firm's operations and status ± Ratio Analysis involves methods of calculating and interpreting financial ratios in order to assess a firm's performance and status
3
Example
(1) (2) (1)/(2) 1.10 .92
Year End Current Assets/Current Liab. Current Ratio
1994 1995
$550,000 /$500,000 $550,000 /$600,000
Copyright
¥1994, HarperCollins Publishers
Interested Parties
4
Three sets of parties are interested in ratio analysis:
Shareholders Creditors Management
Copyright ¥1994, HarperCollins Publishers
Types of Ratio Comparisons
5
There are two types of ratio comparisons that can be made:
Cross-Sectional
Analysis Time-Series Analysis
± Combined Analysis uses both types of analysis to assess a firm's trends versus its competitors or the industry
Copyright ¥1994, HarperCollins Publishers
6
Words of Caution Regarding Ratio Analysis
A
single ratio rarely tells enough to make a sound judgment. Financial statements used in ratio analysis must be from similar points in time. Audited financial statements are more reliable than unaudited statements. The financial data used to compute ratios must be developed in the same manner. Inflation can distort comparisons.
Copyright ¥1994, HarperCollins Publishers
Groups of Financial Ratios
7
Liquidity Activity Debt Profitability
Copyright ¥1994, HarperCollins Publishers
8
Analyzing Liquidity
Liquidity
refers to the solvency of the firm's overall financial position, i.e. a "liquid firm" is one that can easily meet its short-term obligations as they come due. A second meaning includes the concept of converting an asset into cash with little or no loss in value.
Copyright ¥1994, HarperCollins Publishers
Three Important Liquidity Measures
9
Net Working Capital (NWC) NWC = Current Assets - Current Liabilities Current Ratio (CR) Current Assets CR = Current Liabilities Quick (Acid-Test) Ratio (QR) Current Assets - Inventory QR = Current Liabilities
Copyright
¥1994, HarperCollins Publishers
Analyzing Activity
10
Activity
is a more sophisticated analysis of a firm's liquidity, evaluating the speed with which certain accounts are converted into sales or cash; also measures a firm's efficiency
Copyright ¥1994, HarperCollins Publishers
Five Important Activity Measures
11
Inventory Turnover (IT)
IT =
Cost of Goods Sold Inventory Accounts Receivable
Average Collection Period (ACP)
ACP =
Annual Sales/360 Accounts Payable
Average Payment Period (APP)
APP= Annual Purchases/360 Sales
Fixed Asset Turnover (FAT)
FAT =
Net Fixed Assets Sales Total Assets
Total Asset Turnover (TAT)
TAT =
12
Analyzing Debt
Debt
is a true "double-edged" sword as it allows for the generation of profits with the use of other people's (creditors) money, but creates claims on earnings with a higher priority than those of the firm's owners. Financial Leverage is a term used to describe the magnification of risk and return resulting from the use of fixed-cost financing such as debt and preferred stock.
¥Prof. Kuhle
Measures of Debt
13
There
are Two General Types of Debt Measures ±Degree of Indebtedness ±Ability to Service Debts
Four Important Debt Measures
14
Debt Ratio (DR) Debt-Equity Ratio (DER) Times Interest Earned Ratio (TIE) Fixed Payment Coverage Ratio (FPC)
DR=
Total Liabilities Total Assets Long-Term Debt
DER=
Stockholders· Equity
Earnings Before Interest & Taxes (EBIT) TIE= Interest Earnings Before Interest & Taxes + Lease Payments FPC= Interest + Lease Payments +{(Principal Payments + Preferred Stock Dividends) X [1 / (1 -T)]}
Analyzing Profitability
15
± Profitability Measures assess the firm's ability to operate efficiently and are of concern to owners, creditors, and management ± A Common-Size Income Statement, which expresses each income statement item as a percentage of sales, allows for easy evaluation of the firm¶s profitability relative to sales.
Seven Basic Profitability Measures
16
Gross Profit Margin (GPM) Operating Profit Margin (OPM) Net Profit Margin (NPM) Return on Total Assets (ROA) Return On Equity (ROE) Earnings Per Share (EPS) Price/Earnings (P/E) Ratio
GPM=
Gross Profits Sales Operating Profits (EBIT)
OPM =
Sales Net Profit After Taxes
NPM= ROA= ROE=
Sales Net Profit After Taxes Total Assets Net Profit After Taxes Stockholders· Equity Earnings Available for Common Stockholder·s Number of Shares of Common Stock Outstanding Market Price Per Share of Common Stock Earnings Per Share
EPS =
P/E =
A Complete Ratio Analysis
17
DuPont
System of Analysis
± DuPont System of Analysis is an integrative approach used to dissect a firm's financial statements and assess its financial condition ± It ties together the income statement and balance sheet to determine two summary measures of profitability, namely ROA and ROE
DuPont System of Analysis
18
The
firm's return is broken into three components: ± A profitability measure (net profit margin) ± An efficiency measure(total asset turnover) ± A leverage measure (financial leverage
multiplier)
Summarizing All Ratios
19
An
approach that views all aspects of the firm's activities to isolate key areas of concern Comparisons are made to industry standards (cross-sectional analysis) Comparisons to the firm itself over time are also made (time-series analysis)
doc_192570927.ppt