ba 141 ratios

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` To assess a firms financial condition anderformance

` It is of interest to shareholders, creditors,regulators and the firms own management

` Ratios can standardize F/S information and makeit possible to compare companies of varying sizes

1Ratios Practice Problems

` Anyone can crunch the numbers and generate theratiosthe real skill is uttin life into thenumbers

` Establish the perspective / purpose of your analysis

` Benchmarks

Industry

Internal past

2

Internal forecast

Ratios Practice Problems

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` Ratios must be considered together: a single ratiob itself is racticall meanin less

` Compare apples vs. apples: use F/S of companiesthat cover the same time period

` Use audited F/S whenever possible

` Garbage in, garbage out: the financial data beingcompared should have been developed in the same

3

way


` Be wary of inflation distortions

.

A core set of 20 to 25 ratios will usually provide you withjust about the same important information that 100 ratioswill give you


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` Balance Sheet Quality

Hidden liabilities

Hidden assets

Off balance sheet financing


` Earnings Quality

Establishment of reserves

Amortization of intangible assets

Including all losses and debt

Pro forma profitability measures


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` Problems Caused by Inflation

Choice of inventory valuation methods

x LIFO

x FIFO

Rising interest rates causing a decline in the value of long-term debt

7

Recognition of sales


Operating IncomeOperating Profit Margin =

Operating IncomeROA

Ave. Total Assets=

Net IncomeNet Profit Margin

Sales=

8

ROEAve. SHE=

Net IncomeEPS

Wtd. Ave. C/S Outstanding=


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Cost of Goods SoldInventory Turnover =

ve. nven or es

360 daysDays Inventory

Inventory Turnover=

Credit SalesA/R Turnover

Average A/R=

9

360 daysAve. Collection Period

A/R Turnover

=


Cost of Goods SoldA/P Turnover =

Gross ProfitGP Margin

Sales=

360 daysAve. Payment Period

A/P Turnover=

ve.

10

Marketing & Admin ExpOperating Cost RatioSales

=


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SalesFixed Asset Turnover =

Net SalesEquity Turnover

Ave. Equity=

ve. xe sse s

SalesTotal Asset Turnover

Ave. Total Assets=


EBITInterest Coverage =

Total LiabilitiesDebt Equity Ratio

Total Equity=

CFO Debt Interest Lease InterestCash Flow Coverage

Debt Interest Lease Interest

+ +=

+

12

Total LiabilitiesDebt Asset Ratio

Total Assets=


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Current AssetsCurrent Ratio =

Cash Marketable Securities A/RQuick Ratio

Current Liabilities

+ +=

CFOCash Flow to LTD

BV of LTD PV of Operating Lease=

+


Cash Flow to Total Interest-Bearing Debt

CFO=

Total LTD Current Interest-Bearing Liabilities+

1Net Income Net Income

t t

1

1

1

Net IncomeDOL

Sales Sales

Sales

t

t t

t

=


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Stock Market PriceP/E Ratio

EPS= TobinsQ isnamed

aftertheeconomistMarket Value of Equity

Market Book RatioBook Value of Equity

=

MV Equity MV DebtTobin's Q

Replacement Cost of All Assets

+=

ames o n. era oisusefulforpredicting

futureinvestmentactivity:firmsandindustrieswithaq

ratio>1havean

incentivetoinvestsince

themarkets

15

Dividend Yield

Market Price per Share=


isgreaterthanthecost

oftheinvestment.

Dividends Per ShareDividend Payout

EPS=

Operating CFCash Flow per Share =

Stock Market PricePrice / CF

Cash Flow per Share=

Market Cap Market Price per Share Outstanding C/Sx=


( ) ( )0 1n

nx x g= +

1

0

1n

nx

gx

=

CompoundAnnualGrowthRate(CAGR)

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Net income Net income Sales AssetsROE = = x x

Profitability

/ Efficiency Leverage

Cost Control

Net income Net income EBT EBIT Sales Assets

17

Equity EBT EBIT Sales Assets Equity

x x x x= =

Tax Retention Interest Operating Efficiency Leverage

Rate Burden Profit Margin


` Common size Balance Sheet:

Total Assets = 100%

` Common size Income Statement

All items as a % of Total Revenues

Total Revenues = 100%


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` Trend Analysis

Year to year changes


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` Trend analysis 20X0 X1 X2

XYZ current ratio 1.9 2.2 2.3

` Cross-sectional analysis 20X2

XYZ current ratio 2.3

Industry norms 2.5

` Both simultaneously 20X0 X1 X2


XYZ current ratio 1.9 2.2 2.3

Industry norms 2.5 2.4 2.5

` Leverage Ratios

For ualif in Ca ital refer to BSP Circular 538 - Risk Based Ca ital,Adequacy Framework for the Philippine Banking System

Tier 1 Capital Tier 2 CapitalCAR=

Risk Weighted

+

EquityProxy for CAR

Total Assets=

22

EquityEquity to Loans Ratio

Customer Loan Receivables=


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` Liquidity Ratios

Quasi-Liquid AssetsQLAR

Total Assets=

Customer Loan ReceivablesLoans to Deposit

Total Deposit Liabilities=


` Quasi-Liquid Assets

Cash and other cash items

Due from BSP

Due from other banks

Interbank loans receivable and securities purchased under agreements toresell

Trading securities (i.e. FVTPL)

Investment securities : Available-for-Sale (AFS)

Investment securities : Held-to-Maturity (HTM)


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` Coverage Ratios

Allowance for Doubtful AccountsCoverage Ratio

Non-Performing Loans, gross=

Non-Performing Loans, grossNPL Ratio

Total Loans, gross=

25

on- er orm ng oans, gross

Fair Value of Collateral


` Coverage Ratios

Restructured LoansRate of Restructured Loans

Total Loans, gross=

NPL Restructured LoansProblematic Loan Ratio

Total Loans, gross

+=

26

Non-Performing Asset RatioTotal Loans, gross=


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` Profitability Ratios

e n eres ncomeNet Interest Margin

Earning Assets=

Operating ExpensesCost to Income Ratio

Net Interest Income Other Income=

+

Operating ExpensesCost Margin

Ave. Total Assets=

27

( ) ( )NI Interest Expense 1 tax rate

ROTA Ave. Total Assets

+ =

Net IncomeROTE

Ave. SHE=


` Earning Assets

Due from BSP

Due from other banks

Interbank loans receivables and securities purchased under agreements toresell

Trading securities (i.e. FVTPL)

Investment securities : Available-for-Sale (AFS)

Loan Receivables and Advances

` Note: Cash in itself is NOT an earnin asset

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