Ratio Analysis

Rini Novrianti Sutardjo Tui

Ratio Analysis

HistoryExamine trends

BudgetCompare actual with

expected values

CompetitionCompare with other

firms

Categories of Ratios

MarketValue

Liquidity AssetMngt.

DebtMngt.

Profitability

Ratios

Illuminate some aspects

of how business is doing

Liquidity Ratios

Current Ratio

To ensure solvency the current ratio has to exceed 1.0.

Quick Ratio

Measures liquidity without considering inventory (the firm’s least liquid current asset).

sliabilitieCurrent

assetsCurrentRatioCurrent

_

__

sliabilitieCurrent

InventoryassetsCurrentRatioQuick

_

__

Asset Management Ratios

Inventory Turnover measures how many times a year the firm uses up an average stock of goods.

Average Collection Period measures the time it takes to collect on credit sales.

ACP IT FAT TAT

Total Asset Turnover is more widely used than Fixed Asset Turnover.

Fixed Asset Turnover is appropriate in industries where significant equipment is required to do business.

salesdailyAverage

sreceivableAccountACP

__

_

Inventory

CoGSTurnoverInventory _

netassetsFixed

totalSalesFAT

_

totalassetsFixed

totalSalesTAT

_

Debt Management Ratios

Times Interest EarnedDebt-to-equity Ratio

Cash CoverageFixed Charge Coverage

DebtMngt.

equityCommon

LTdebt

_ enseInterest

EBIT

exp_

enseInterest

ondepreciatiEBIT

exp_

paymentleaseenseInterest

paymentleaseEBIT

_exp_

_

Profitability Ratios

ROSReturn on Sales represents a fundamental indication of the overall profitability of the business

ROAReturn on Assets measures the overall ability of the firm to utilize the assets in which it has invested to earn a profit.

ROEReturn on Equity measures the firm’s ability to earn a return on the owners’ invested capital.

Sales

incomeNetROS

_

assetsTotal

incomeNetROA

_

_

equityrsStakeholde

incomeNetROE

'

_

Market Value Ratios

PE Ratio

Tells how much investors are willing to pay for a dollar of the firm’s earnings.

Market-to-book Value Ratio

A healthy company is expected to have a market value greater than its book value.

shareperEarning

pricestockCurrentRatioPE

__

___

sharepervalueBook

pricestockCurrentratiovaluebooktoMarket

___

____

Rate of ReturnC= 50

C= 500

C= 450

I= 50

I= 250

I= 200

I= 50

I= 250

I= 200

L= 50

L= 500

L= 450

0

0

0

1

1

1

5

5

5

5,5,

5050500ii F

PA

PPW Eq. i=RORA=100%, >i*= 15%

5,5,

5002505000ii F

PA

PPW Eq. i=RORB=50%, >i*= 15%

5,5,

4502004500ii F

PA

PPW Eq. i=RORB-A=44.4%, >i*= 15%

A

B

B-A

Net Value AnalysisC= 50

C= 500

C= 450

I= 50

I= 250

I= 200

I= 50

I= 250

I= 200

L= 50

L= 500

L= 450

0

0

0

1

1

1

5

5

5

A

B

B-A

50.286$505050

50.42$505050

50.142$505050

5%,155%,15

5%,155%,15

5%,155%,15

PF

AFNFV

PA

FANAV

FP

APNPV

A

A

A

ABAB

ABAB

ABAB

NFVNFVNFV

NAVNAVNAV

NPVNPVNPV

Ratio AnalysisC= 50

C= 500

C= 450

I= 50

I= 250

I= 200

I= 50

I= 250

I= 200

L= 50

L= 500

L= 450

0

0

0

1

1

1

5

5

5

A

B

B-A

0,85.250

50.142

Cost

AA

PW

NPVPVR

0,17.1500

6.586

Cost

BB

PW

NPVPVR

0,99.0450

444

Investment

ABAB

PW

NPVPVR

C l i c k t o e d i t c o m p a n y s l o g a n .

A double pipe heat exchanger with steam in the shell is to be insulated to reduceheat loss to surroundings. The thickness of insulation, initial cost and projectedannual cost of heat loss are given in the following table. If the minimum ROR is20% before taxes, determine the optimum thickness of insulation for an insulationlife of 6 years with zero salvage value.

Insulation Thickness (inch)

• 0• 1• 2• 3• 4

Initial Cost ($)

• 0• 1,200• 1,800• 2,500• 3,500

Annual Heat Loss Cost ($)

• 1,400• 800• 600• 500• 400