financial ratios meanings
TRANSCRIPT
-
8/10/2019 Financial Ratios Meanings
1/27
Chapter 14Suggestions for Case
Analysis
-
8/10/2019 Financial Ratios Meanings
2/27
Case Analysis
Research:
Annual reports
10K form Income statements
Balance sheets
Cash flow statements
Economic conditions
Industry information
-
8/10/2019 Financial Ratios Meanings
3/27
Case Analysis
Resources for Case Library Research:
Company Information: Moodys Manuals on Investment
Standard & Poors Regis ter of
Corpo rat ions , Directo rs, and Executives
Value Lines Investment Survey Findex: The Directo ry of Market Research
Repo rts, Studies and Surveys
-
8/10/2019 Financial Ratios Meanings
4/27
Case Analysis
Resources for Case Library Research:
Economic Information:
Bus iness Cycle Developm ent
U.S. Censu s Bureau
Current Business Repor ts
Econom ic Indicators
Long -Term Economic Growth Month ly L abor Review
U.S. Ind us tr ial Outlo ok
Overseas Bus iness Repo rts
-
8/10/2019 Financial Ratios Meanings
5/27
Case Analysis
Resources for Case Library Research:
Industry Information:
Business Week
Fortune
Indu stry Survey
Indu stry Week Forbes
Inc.
-
8/10/2019 Financial Ratios Meanings
6/27
Case Analysis
Resources for Case Library Research:
Directory and Index Information:
Business Per iodical Index Directo ry of National Trade Assoc iat ion s
Encyclopedia of Associat ions
Funk and ScottsIndex of Corporat ions
and Indu str ies ThomassRegister of AmericanManufacturers
Wall Street Jou rnal Index
-
8/10/2019 Financial Ratios Meanings
7/27
Case Analysis
Resources for Case Library Research:
Ratio Analysis Information: Almanac of Business and Industr ia l
Financ ial Ratios
Annual Statement Studies
Duns Review
Indu stry Norms and Key Business Rat ios
-
8/10/2019 Financial Ratios Meanings
8/27
Case Analysis
Resources for Case Library Research:
Online Information:
www.hoovers .com
www.sec.gov
www.pathf inder .com
www.dbisna.com/dnb/dnbhome.htm
www.fu ld .com
www.economist .com
www.w100.com
www.b loomberg .com
-
8/10/2019 Financial Ratios Meanings
9/27
Case Analysis
Financial Analysis:
Ratio analysis Liqu id i ty rat ios- examines f i rm cash
generat ion levels & cash convert ib i l i ty Prof i tabi l i ty rat ios- show extent to whichf i rm activ i t ies generate pro f i ts
Ac t iv i ty ratios- explores cycles of cashand p roduct turno ver in f i rms
Leverage rat ios - demonstrates firm debtlevels & interest responsibi l i t ies
-
8/10/2019 Financial Ratios Meanings
10/27
Financial Ratio AnalysisLiquidity
1. Liquidity Ratios
Current ratio
Quick (acid test) ratio
Inventory to net
working capital
Cash ratio
How
Formula Expressed Meaning
Current assets
Current liabilities Decimal
Decimal
Decimal
Decimal
A short-term indicator of the companys
ability to pay its short-term liabilities
from short-term assets; how much of
current assets are available to cover
each dollar of current liabilities.Measures the companys ability to pay
off its short-term obligations from
current assets, excluding inventories.
A measure of inventory balance;
measures the extent to which the
cushion of excess current assets over
current liabilities may be threatened by
unfavorable changes in inventory.Measures the extent to which the
companys capital is in cash or cash
equivalents; shows how much of the
current obligations can be paid from
cash or near-cash assets.
Current assetsInventory
Current liabilities
InventoryCurrent assetsCurrent liabilities
Cash + Cash equivalents
Current liabilities
-
8/10/2019 Financial Ratios Meanings
11/27
Financial Ratio Analysis
Profitability
2. Profitability Ratios
Net profit margin
Gross profit margin
Return on investment
(ROI)
Return on equity
(ROE)
Earnings per share
(EPS)
How
Formula Expressed Meaning
Net profit after taxes
Net sales Percentage
Percentage
Percentage
Percentage
Dollars per
share
Shows how much after-tax profits are
generated by each dollar of sales.
Indicates the total margin available to
cover other expenses beyond cost of
goods sold, and still yield a profit.
Measures the rate of return on the total
assets utilized in the company; a
measure of managements efficiency, it
shows the return on all the assets
under its control regardless of source
of financing.
Measures the rate of return on the
book value of shareholders totalinvestment in the company.
Shows the after-tax earnings
generated for each share of common
stock.
SalesCost of goods sold
Net sales
Net profit after taxes
Shareholders equity
Net profit after taxes
preferred stock dividends
Average number of
common shares
Net profit after taxes
Total assets
-
8/10/2019 Financial Ratios Meanings
12/27
-
8/10/2019 Financial Ratios Meanings
13/27
Financial Ratio AnalysisLeverage
4. Leverage Ratios
Debt to asset ratio
Debt to equity ratio
Long-term debt to
capital structure
Times interest earned
Coverage of fixed
charges
Current liabilities to
equity
How
Formula Expressed Meaning
Total debt
Total assetsPercentage
Percentage
Percentage
Decimal
Decimal
Percentage
Measures the extent to which borrowed
funds have been used to finance the
companys assets.
Measures the funds provided by creditorsversus the funds provided by owners.
Measures the long-term component of
capital structure.
Indicates the ability of the company to
meet its annual interest costs.
A measure of the companys ability to
meet all of its fixed-charge obligations.
Measures the short-term financing
portion versus that provided by owners.
Total debtShareholders equity
Long-term debtShareholders equity
Profit before taxes +
Interest charges + Lease chargesInterest charges + Lease obligations
Profit before taxes + Interest charges
Interest charges
Current liabilitiesShareholders equity
-
8/10/2019 Financial Ratios Meanings
14/27
Financial Ratio AnalysisOther
5. Other Ratios
Price/earning ratio
Dividend payout ratio
Dividend yield on
common stock
How
Formula Expressed Meaning
Market price per shareEarnings per share Decimal
Percentage
Percentage
Shows the current markets evaluation
of a stock, based on its earnings;
shows how much the investor is willing
to pay for each dollar of earnings.
Indicates the percentage of profit that
is paid out as dividends.
Indicates the dividend rate of return to
common shareholders at the current
market price.
Annual dividends per shareAnnual earnings per share
Annual dividends per share
Current market price per share
Note: In using ratios for analysis, calculate ratios for the corporation and compare them to the average and quartile ratios forthe particular industry. Refer to Standard and Poors and Robert Morris Associates for average industry data. Special thanksto Dr. Moustafa H. Abdelsamad, Dean, Business School, Texas A&M UniversityCorpus Christi, Corpus Christi, Texas, forhis definitions of these ratios.
-
8/10/2019 Financial Ratios Meanings
15/27
Case Analysis
Analyzing Financial Statements:
Scrutinize historical statements
Compare historical statements over
time
Calculate changes in categories from
year to year
Determine the change as a percentage Adjust for inflation
-
8/10/2019 Financial Ratios Meanings
16/27
Case Analysis
Analyzing Financial Statements (cont.):Use Financial Statements To:
Compare historical statements of one
firm over time (explore trends) Examine performance relative to direct
competitors
Examine performance relative to
industry averages
-
8/10/2019 Financial Ratios Meanings
17/27
Case Analysis
Economic Measures: Constant dollars
Dollars adjusted for inflation to make themcomparable over various years.
CPI
Prime interest rate Rate of interest banks charge on their lowest risk
loans. Gross Domestic Product (GDP)
Total output of goods and services within acountrys borders.
-
8/10/2019 Financial Ratios Meanings
18/27
Strategic Audit Worksheet: Part 1
Analysis CommentsStrategic Audit Heading
(+) Factors (-) Factors
I. Current Situation
A. Past Corporate PerformanceIndexes
B. Strategic Posture Current Mission Current Objectives Current Strategies Current Policies
SWO T Analysis Begins:
II. Corporate Governance
A. Board of Directors
B. Top Management
III. External Environment(EFAS):
Opportunities and Threats(SWO T)
A. Societal Environment
B. Task Environment Industry AnalysisIV. Internal Environment(IFAS):
Strengths and Weaknesses(SWOT) A. Corporate Structure
B. Corporate Culture
C. Corporate Resources
-
8/10/2019 Financial Ratios Meanings
19/27
Strategic Audit Worksheet: Part 2
Analysis CommentsStrategic Audit Heading
(+) Factors (-) Factors
1. Marke ting
2. Finance
3. Research and Development
4. Ope rations and Logistics
5. Human Resources
6. Information SystemsV. Analysis of Strategic Factors(SFAS)
A. Key Internal and ExternalStrategic Factors (SWO T)
B. Review of Mission and Objectives
SWO T Analysis Ends. Recomm endation Begins:
VI. Alternatives and Recom mend ations
A. S trategic Alternatives
B. Recommended Strategy
VII. Implementation
VIII. Evaluation and Control
-
8/10/2019 Financial Ratios Meanings
20/27
Case Analysis
Case Analysis Method:
Read case Read case with strategic audit
Begin SWOT analysis
EFAS
IFAS
-
8/10/2019 Financial Ratios Meanings
21/27
Case Analysis
Case Analysis Method:
Write Strategic Audit Parts IIV
Write Strategic Audit
Part V
SFAS
-
8/10/2019 Financial Ratios Meanings
22/27
Case Analysis
Write Strategic Audit Part VI Alternatives
Recommendations
Write Strategic Audit Part VII
Implementation
Write Strategic Audit Part VIII Evaluation & Control
-
8/10/2019 Financial Ratios Meanings
23/27
Prentice Hall,2000Prentice Hall,
Chapter 14Chapter 14Wheelen/Hunger
Financial Ratio AnalysisLiquidity
14.1a Financial Ratio Analysis Liquidity (Table 14.1)
1. Liquidity Ratios
Current ratio
Quick (acid test) ratio
Inventory to net
working capital
Cash ratio
How
Formula Expressed Meaning
Current assets
Current liabilities Decimal
Decimal
Decimal
Decimal
A short-term indicator of the companys
ability to pay its short-term liabilities
from short-term assets; how much of
current assets are available to cover
each dollar of current liabilities.
Measures the companys ability to pay
off its short-term obligations from
current assets, excluding inventories.
A measure of inventory balance;
measures the extent to which the
cushion of excess current assets over
current liabilities may be threatened by
unfavorable changes in inventory.Measures the extent to which the
companys capital is in cash or cash
equivalents; shows how much of the
current obligations can be paid from
cash or near-cash assets.
Current assetsInventory
Current liabilities
InventoryCurrent assetsCurrent liabilities
Cash + Cash equivalents
Current liabilities
196
-
8/10/2019 Financial Ratios Meanings
24/27
Prentice Hall,2000Prentice Hall,
Chapter 14Chapter 14Wheelen/Hunger
14.1b Financial Ratio Analysis Profitability (Table 14.1)
Financial Ratio Analysis
Profitability2. Profitability Ratios
Net profit margin
Gross profit margin
Return on investment
(ROI)
Return on equity
(ROE)
Earnings per share
(EPS)
How
Formula Expressed Meaning
Net profit after taxes
Net sales Percentage
Percentage
Percentage
Percentage
Dollars per
share
Shows how much after-tax profits are
generated by each dollar of sales.
Indicates the total margin available to
cover other expenses beyond cost of
goods sold, and still yield a profit.
Measures the rate of return on the total
assets utilized in the company; a
measure of managements efficiency, it
shows the return on all the assets
under its control regardless of source
of financing.
Measures the rate of return on the
book value of shareholders totalinvestment in the company.
Shows the after-tax earnings
generated for each share of common
stock.
SalesCost of goods sold
Net sales
Net profit after taxes
Shareholders equity
Net profit after taxes
preferred stock dividends
Average number of
common shares
Net profit after taxes
Total assets
197
-
8/10/2019 Financial Ratios Meanings
25/27
-
8/10/2019 Financial Ratios Meanings
26/27
Prentice Hall,2000Prentice Hall,
Chapter 14Chapter 14Wheelen/Hunger
14.1d Financial Ratio Leverage (Table 14.1)
Financial Ratio AnalysisLeverage
4. Leverage Ratios
Debt to asset ratio
Debt to equity ratio
Long-term debt to
capital structure
Times interest earned
Coverage of fixed
charges
Current liabilities to
equity
How
Formula Expressed Meaning
Total debt
Total assetsPercentage
Percentage
Percentage
Decimal
Decimal
Percentage
Measures the extent to which borrowed
funds have been used to finance the
companys assets.
Measures the funds provided by creditorsversus the funds provided by owners.
Measures the long-term component of
capital structure.
Indicates the ability of the company to
meet its annual interest costs.
A measure of the companys ability to
meet all of its fixed-charge obligations.
Measures the short-term financing
portion versus that provided by owners.
Total debtShareholders equity
Long-term debtShareholders equity
Profit before taxes +
Interest charges + Lease chargesInterest charges + Lease obligations
Profit before taxes + Interest charges
Interest charges
Current liabilitiesShareholders equity
199
-
8/10/2019 Financial Ratios Meanings
27/27
Prentice Hall,2000Prentice Hall
Chapter 14Chapter 14Wheelen/Hunger
14.1e Financial Ratio Analysis Other (Table 14.1 )
Financial Ratio AnalysisOther
5. Other Ratios
Price/earning ratio
Dividend payout ratio
Dividend yield on
common stock
How
Formula Expressed Meaning
Market price per shareEarnings per share Decimal
Percentage
Percentage
Shows the current markets evaluation
of a stock, based on its earnings;
shows how much the investor is willing
to pay for each dollar of earnings.
Indicates the percentage of profit that
is paid out as dividends.
Indicates the dividend rate of return to
common shareholders at the current
market price.
Annual dividends per shareAnnual earnings per share
Annual dividends per share
Current market price per share
Note: In using ratios for analysis, calculate ratios for the corporation and compare them to the average and quartile ratios forthe particular industry. Refer to Standard and Poors and Robert Morris Associates for average industry data. Special thanksto Dr. Moustafa H. Abdelsamad, Dean, Business School, Texas A&M UniversityCorpus Christi, Corpus Christi, Texas, forhis definitions of these ratios.
200