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Oct 22, 2014

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Ratios

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91 Aufrufe

Ratios

© All Rights Reserved

Als PDF, TXT **herunterladen** oder online auf Scribd lesen

- Financial Statements Analysis
- Ratio Analysis
- Ratio Analysis
- Ratio Analysis
- Business plan of the Spectris
- Ashok Leyland Valuation_Report
- Ratio Analysis
- Cost Volume Profit Analysis.pptx
- Ratios
- Cash Flow and Ratio Analysis
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- Ultratech 4Q FY 2013
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- Ratio Analysis
- Book1
- Chapter 1 Ratios
- New Microsoft Word Document
- Assignment
- chap3

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1. Assessment of Past Performance

Past performance is a good indicator of future performance. Investors or creditors are interested in the

trend of past sales, cost of goods sold, operating expenses, net income, cash flows and return on

investment. These trends offer a means for judging management's past performance and are possible

indicators of future performance.

2. Assessment of current position

Financial statement analysis shows the current position of the firm in terms of the types of assets

owned by a business firm and the different liabilities due against the enterprise.

3. Prediction of profitability and growth prospects

Financial statement analysis helps in assessing and predicting the earning prospects and growth rates

in earning which are used by investors while comparing investment alternatives and other users in

judging earning potential of business enterprise.

4. Prediction of bankruptcy and failure

Financial statement analysis is an important tool in assessing and predicting bankruptcy and

probability of business failure.

5. Assessment of the operational efficiency

Financial statement analysis helps to assess the operational efficiency of the management of a

company. The actual performance of the firm which is revealed in the financial statements can be

compared with some standards set earlier and the deviation of any between standards and actual

performance can be used as the indicator of efficiency of the management.

General Approach to FS Analysis

1. Traditional approach - use of ratio analysis, horizontal and vertical

2. Modern approach both internal and external business environment are taken into consideration.

The approach is futuristic as opposed to traditional approach.

Common Size/Vertical Analysis

Trend Analysis/Horizontal Analysis

VS

Financial Ratio Analysis

Question Category of Ratios Used

1. How liquid is the firm? Will it be able to pay its

bill as they become due?

LIQUIDITY RATIOS

2. How has the firm financed the purchase of its

assets?

CAPITAL STRUCTURE RATIOS

3. How efficient has the firms management been

in utilizing its assets to generate sales?

ASSET MANAGEMENT EFFICIENCY RATIOS

4. Has the firm earned adequate returns on

investment?

PROFITABILITY RATIOS

5. Are the firms managers creating value for

shareholders?

MARKET VALUE RATIOS

A. LIQUIDITY RATIOS short term solvency

RATIO FORMULA FUNCTION

1. Working

Capital

Current assets Current Liabilities

It measures how much in liquid assets a company

has available to build its business.

2. Current Ratio Current Assets Current Liabilities

Ability to repay short-term commitments

promptly. (Short-term Solvency) Ideal Ratio is

2:1.High Ratio indicates existence of idle current

assets.

3. Quick Ratio

or Acid test

ratio

(Current Assets - Inventory &

Prepaid Assets) Current Liabilities

Ability to meet immediate liabilities. Ideal

Ratio is 1.33:1

4. Absolute Cash

Ratio

(Cash + Marketable Securities)

Current Liabilities

Availability of cash to meet short-term

commitments.

Can a Firm Have Too Much Liquidity? A high investment in liquid assets will enable the firm to repay its

current liabilities in a timely manner. However, an excessive investment in liquid assets can prove to be

costly as liquid assets generate minimal return.

B. CAPITAL STRUCTURE RATIOS

RATIO FORMULA FUNCTION

1. Times

Interest

Earned

EBIT Interest Expense

Indicates the extent to which operations cover

interest expense

2. Debt Ratio Total Liabilities Total Assets

Measures the proportion of the firms assets that

are financed by borrowing or debt financing.

3. Equity Ratio Total SHE Total Assets

Measures the proportion of the firms assets that

are financed by owners.

4. Debt Equity

Ratio

Total Liabilities Total SHE

Measures the proportion of assets provided by

creditors compared to that provided by owners. ;

Ideal ratio is 2:1.

5. Fixed Asset to

Long-term

Liabilities

Fixed Asset Long-term Liabilities

Reflect the extent of the utilization of resources

from long-term debt. Indicates sources of

additional funds.

6. Fixed Asset to

Total Equity

Fixed Asset Total Equity

Indicates the over or under investment by

owners.

7. Fixed Assets

to Total

Assets

Net Fixed Asset Total Assets Indicates possible over expansion of PPE

8. BPS on CS CS equity # of CS Outstanding

Measures recoverable amount in the event of

liquidation if assets are realized at their BV.

9. Times

Preferred

Dividend

requirements

Net Income after Tax Preferred

Dividend Requirement

Indicates ability to provide dividends to preferred

shareholders

10. Times Fixed

Charges

Earned

Net Income before Taxes and Fixed

Charges Fixed Charges

FC=rent+ interest+ sinking fund

payment before taxes

Indicates ability to cover fixed charges.

C. ASSET MANAGEMENT EFFICIENCY RATIOS

RATIO FORMULA FUNCTION

1. Accounts

Receivable

Turnover

Annual Credit Sales Ave. Accounts

Receivable

Measures how many times accounts receivable

are rolled over during a year

2. Average

Collection

Period

Accounts Receivable Daily Credit

Sales

or

365 Receivable Turnover

Measures how fast the firm collects its accounts

receivables

3. Inventory

Turnover

Cost of Goods Sold Ave. Inventory

Measures how many times the company turns

over its inventory during the year.

4. Average Age

of Inventory

Inventory Daily COGS

or

365 Inventory Turnover

Indicates the number of days before an inventory

is sold. Shorter inventory cycles lead to greater

liquidity since the items in inventory are

converted to cash more quickly.

5. Operating

Cycle

Average Collection Period + Average

Age of Inventory

Indicates the number of days it takes for

inventories to be converted into cash. The shorter

the better.

6. Trade

Payables

Turnover

Net Credit Purchases Ave. Trade

Payables

This measurement of liquidity measures the

number of times account payables turnover in

one year. Low turnover is indicative of cash flow

problems.

7. Average Age

of Trade

Payables

365 Payables Turnover

Indicates the number of days it takes for payables

to be paid. The longer the better

8. Cash Flow

Cycle

Operating Cycle - Average Age of

Trade Payables

Indicates how fast the company purchases

inventories, sell it to customers, collect payment

and pay its suppliers.

9. Current Asset

Turnover

[COGS + OPEX(excluding depreciation

& amortization)] Ave. Current

Assets

Measures the movement and utilization of current

assets to meet operating requirements

10. Working

Capital to

Total Asset

Working Capital Total Asset

Indicates relative liquidity of total assets and

distribution of resources employed.

11. Working

Capital

Turnover

Net Sales Ave. Working Capital Indicates adequacy and activity of working capital

11. Sales to Fixed

Assets (Plant

Turnover)

Net Sales Net Fixed Assets

Test roughly the efficiency of management in

keeping plant properties employed

12. Asset

Turnover

Sales Total Asset

Indicates the revenue generated by total assets.

The higher the better.

13. Fixed Asset

Turnover

Sales Net Fixed Asset

Measures firms efficiency in utilizing its fixed

assets.

D. PROFITABILITY RATIOS

RATIO FORMULA FUNCTION

1. Gross Profit

Ratio

Gross Profit Net Sales

It shows how well the firms management

controls its expenses to generate profits.

2. Return on Sales Income Net Sales

Indicates the amount of income earned for

every peso sale.

3. Operating Profit

Ratio

EBIT Net Sales

It indicates how well the firm is managing its

income statement.

4. Return on Total

Asset (ROA)

Income Ave Total Assets

Indicate the efficiency of managers in using

total assets in operating the business.

5. Return on

Owners Equity

(ROE)

Net Income Ave. Equity Indicates the amount earned on investment.

6. Earnings Per

Share

(Net Income Preferred dividends

Requirement) Weighted Ave # of CS

Indicate the amount of income earned by each

common share.

7. Rate of Return

on Current

Assets

Net Income / Ave Current Assets

Indicates the profitability of current assets

invested.

***** Du Pont Method: ROE = ROS(Profitability) x Asset Turnover(Efficiency) x Equity Multiplier

E. MARKET VALUE RATIOS

RATIO FORMULA FUNCTION

1. Price/Earnings

Ratio

Price per share Earnings per share

Indicates the number of pesos required to pay 1

peso of earnings

2. Dividend Yield Dividend per share Price per share

Indicates the rate of return in the investors CS

investment

3. Dividend Pay-

out

Common Dividend per share EPS

Indicates the portion of earnings distributed as

dividends

The Limitations of Ratio Analysis

1. Picking an industry benchmark can sometimes be difficult.

2. Published peer-group or industry averages are not always representative of the firm being analyzed.

3. An industry average is not necessarily a desirable target or norm.

4. Accounting practices differ widely among firms.

5. Many firms experience seasonal changes in their operations.

6. Financial ratios offer only clues. We need to analyze the numbers in order to fully understand the

ratios.

7. The results of financial analysis are dependent on the quality of the financial statements.

Assignment: Answers to be given next meeting

1. Russell Securities has P100 million in total assets and its corporate tax rate is 40 percent. The

company recently reported that its basic earning power (BEP) ratio was 15 percent and that its

return on assets (ROA) was 9 percent. What was the companys interest expense?

2. A firm has a profit margin of 15 percent on sales of P20,000,000. If the firm has debt of P7,500,000,

total assets of P22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the

firm's ROA?

3. Tapley Dental Supply Company has the following data:

Net income: P240 Sales: P10,000 Total assets: P6,000

Debt ratio: 75% TIE ratio: 2.0 Current ratio: 1.2

BEP ratio: 13.33%

If Tapley could streamline operations, cut operating costs, and raise net income to P300, without

affecting sales or the balance sheet (the additional profits will be paid out as dividends), by how

much would its ROE increase?

4. Your company had the following balance sheet and income statement information for 2003:

Balance sheet:

Cash P 20

A/R 1,000

Inventories 5,000

Total C.A. P 6,020 Debt P 4,000

Net F.A. 2,980 Equity 5,000

Total Assets P 9,000 Total claims P 9,000

Income statement:

Sales P10,000

Cost of goods sold 9,200

EBIT P 800

Interest (10%) 400

EBT P 400

Taxes (40%) 160

Net Income P 240

The industry average inventory turnover is 5. You think you can change your inventory control

system so as to cause your turnover to equal the industry average, and this change is expected to

have no effect on either sales or cost of goods sold. The cash generated from reducing inventories

will be used to buy tax-exempt securities which have a 7 percent rate of return. What will your

profit margin be after the change in inventories is reflected in the income statement?

5. Ruth Company currently has P1,000,000 in accounts receivable. Its days sales outstanding (DSO) is

50 days (based on a 365-day year). Assume a 365-day year. The company wants to reduce its DSO

to the industry average of 32 days by pressuring more of its customers to pay their bills on time.

The company's CFO estimates that if this policy is adopted the company's average sales will fall by

10 percent. Assuming that the company adopts this change and succeeds in reducing its DSO to 32

days and does lose 10 percent of its sales, what will be the level of accounts receivable following the

change?

6. The Meryl Corporation's common stock is currently selling at P100 per share, which represents a

P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a return on equity of 20

percent, and a debt ratio of 60 percent, what is its return on total assets (ROA)?

7. Oliver Incorporated has a current ratio = 1.6, and a quick ratio equal to 1.2. The company has P2

million in sales and its current liabilities are P1 million. What is the companys inventory turnover

ratio?

8. Kansas Office Supply had P24,000,000 in sales last year. The companys net income was P400,000.

Its total assets turnover was 6.0. The companys ROE was 15 percent. The company is financed

entirely with debt and common equity. What is the companys debt ratio?

9. The Merriam Company has determined that its return on equity is 15 percent. Management is

interested in the various components that went into this calculation. You are given the following

information: total debt/total assets = 0.35 and total assets turnover = 2.8. What is the profit

margin?

10. Harvey Supplies Inc. has a current ratio of 3.0, a quick ratio of 2.4, and an inventory turnover ratio

of 6. Harvey's total assets are P1 million and its debt ratio is 0.20. The firm has no long-term debt.

What is Harvey's sales figure?

11. Collins Company had the following partial balance sheet and complete annual income statement:

Partial Balance Sheet:

Cash P 20

A/R 1,000

Inventories 2,000

Total current assets P 3,020

Net fixed assets 2,980

Total assets P 6,000

Income Statement:

Sales P10,000

Cost of goods sold 9,200

EBIT P 800

Interest (10%) 400

EBT P 400

Taxes (40%) 160

Net Income P 240

The industry average DSO is 30 (based on a 365-day year). Collins plans to change its credit policy

so as to cause its DSO to equal the industry average, and this change is expected to have no effect on

either sales or cost of goods sold. If the cash generated from reducing receivables is used to retire

debt (which was outstanding all last year and which has a 10 percent interest rate), what will

Collins' debt ratio (Total debt/Total assets) be after the change in DSO is reflected in the balance

sheet?

12. Last year, Quayle Energy had sales of P200 million, and its inventory turnover ratio was 5.0. The

companys current assets totaled P100 million, and its current ratio was 1.2. What was the

companys quick ratio?

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