Scribd
Upload
54 views5 pages

Chap 3

This document provides an overview of various types of financial ratios used to analyze companies' financial statements and performance. It discusses liquidity ratios, asset management ratios, debt management ratios, profitability ratios, market value ratios, and limitations of ratio analysis. The DuPont chart and equation are also explained as tools for tying different ratios together to evaluate a company's return on assets and equity.

Uploaded by

Tahir Naeem Jatt
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
54 views5 pages

Chap 3

This document provides an overview of various types of financial ratios used to analyze companies' financial statements and performance. It discusses liquidity ratios, asset management ratios, debt management ratios, profitability ratios, market value ratios, and limitations of ratio analysis. The DuPont chart and equation are also explained as tools for tying different ratios together to evaluate a company's return on assets and equity.

Uploaded by

Tahir Naeem Jatt
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
You are on page 1/ 5

Analysis of Financial Statements From the investors point of view Predicting the future is what financial statements is all

about From the managements point of view Financial statement analysis is useful both to help anticipate future conditions and, more important, as a starting point for planning actions that will improve the firms future performance. Liquidity Ratios Ratios that show the relationship of a firms cash and other current assets to its current liabilities. Liquid Asset An asset that can be converted to cash quic ly without having to reduce the assets price very much. !urrent Ratio "he e#tent to which current liabilities are covered by those assets e#pected to be converted to cash in the near future. !urrent Ratio $ !urrent Assets !urrent Liabilities

%uic &Acid "est' Ratio %uic Ratio $ !urrent Assets ( )nventories !urrent Liabilities

Asset Management Ratios A set of ratios that measure how effectively a firm is managing its assets. *oes the total amount of each type of asset as reported on the balance sheet seem reasonable, too high, or too low in view of current and pro+ected sales level. ,valuating )nventories "he )nventory "urnover Ratio -ow many times each item of inventory is sold out and re(stoc ed. )nventory "urnover Ratio $ .ales )nventories

,valuating Receivables "he *ays .ales /utstanding "he average length of time the firm must wait after ma ing a sale before it receives cash.

*./

Receivables Average .ales Per *ay

Receivables Annual .ales 0 123

,valuating Fi#ed Assets "he Fi#ed Assets "urnover Ratio -ow effectively the firm uses its plant and equipment Fi#ed Assets "urnover Ratio ,valuating "otal Assets "he "otal Assets "urnover Ratio "otal Assets "urnover Ratio Debt Management Ratios ,ffects of Financial Leverage on .toc holders Return5 "able 1(6 &page 78' -ow the Firm is Financed "otal *ebt to "otal Assets *ebt Ratio $ "otal *ebt "otal Assets $ .ales "otal Assets $ .ales 4et Fi#ed Assets

Ability to Pay )nterest "imes )nterest ,arned A measure of firms ability to meet its annual interest payments. "he e#tent to which operating income can decline before the firm is unable to meet its annual interest costs. "), Ratio $ ,9)" )nterest !harges

Ability to .ervice *ebt ,9)"*A !overage Ratio A ratio whose numerator includes all cash flows available to meet fi#ed charges and whose denominator includes all fi#ed financial charges. ,9")*A !overage Ratio $ ,9")*A : Lease Payments )nterest : Principal Payments : Lease Payments

Profitability Ratios A group of ratios that shows the combined effects of liquidity, asset management, and debt on operating results. Profit ;argin on .ales ;easure of net income per dollar of sales.

Profit ;argin on .ales

4et )ncome Available to !ommon .toc holders .ales

9asic ,arning Power &9,P' "he ability of the firms assets to generate operating income. 9,P Ratio $ ,9)" "otal .ales

Return on "otal Assets R/A $ 4et )ncome Available to !ommon .toc holders "otal Assets

Return on !ommon ,quity ;easures the rate pf return on common stoc holders investment R/, $ 4et )ncome Available to !ommon .toc holders !ommon ,quity

Market Value Ratios A set of ratios that relate the firms stoc price to its earnings, cash flow, and boo value per share. "hese ratios give management an indication of what investors thin of the companys past performance and future prospects. Price 0 ,arning Ratio .hows the dollar amount investors will pay for <6 of current earnings. P 0 , Ratio $ Price Per .hare ,arnings Per .hare

Price 0 !ash Flow Ratio .hows the dollar amount investors will pay for <6 cash flow. Price 0 !ash Flow $ Price Per .hare !ash Flow Per .hare

;ar et 0 9oo Ratio "he ratio of a stoc s mar et price to its boo value. 9oo =alue Per .hare ; 0 9 Ratio $ $ !ommon ,quity .hares /utstanding ;ar et Price Per .hare 9oo =alue Per .hare

Trend Analysis An analysis of a firms financial position over time> used to estimate the li elihood of improvement or deterioration in its financial condition. Tying The Ratios Together The Du Pont !hart and "quation *u Pont !hart is designed to show the relationship among return on investment, asset turnover, the profit margin, and leverage. "able 1(? Figure 1(? &page 632(63@' *u Pont ,quation A formula which shows that the rate of return on assets can be found as the product of the profit margin times the total assets turnover. R/A $ $ Profit ;argin 4et )ncome .ales $ R/A 4et )ncome "otal Assets # # # # "otal Assets "urnover .ales "otal Assets

,quity ;ultiplier R/, $

"otal Assets !ommon ,quity ,quity ;ultiplier "otal Assets !ommon ,quity

R/,

$ $

Profit ;argin # "otal Assets "urnover # ,quity ;ultiplier 4et )ncome .ales # .ales "otal Assets # "otal Assets !ommon ,quity

#ses and Limitations of Ratio Analysis !omparison with industry averages is difficult if the firm operates many different divisions AAverageB performance not necessarily good. .easonal factors can distort ratios. ACindow dressingB techniques can ma e statements and ratios loo better. *ifferent operating and accounting practices distort comparisons. .ometimes hard to tell if a ratio is AgoodB or Abad.B *ifficult to tell whether company is, on balance, in strong or wea position. Looking $eyond %umbers Are the companys revenues tied to 6 ey customerD "o what e#tent are the companys revenues tied to 6 ey productD "o what e#tent does the company rely on a single supplierD Chat percentage of the companys business is generated overseasD !ompetition Future prospects Legal and regulatory environment

You might also like