DuPont Analysis

The Dupont analysis also called the Dupont model is a financial ratio based on the return on equity ratio that is
used to analyze a company's ability to increase its return on equity. In other words, this model breaks down the
return on equity ratio to explain how companies can increase their return for investors.

The Dupont analysis looks at three main components of the ROE ratio.

Profit Margin
Total Asset Turnover
Financial Leverage

Based on these three performances measures the model concludes that a company can raise its ROE by
maintaining a high profit margin, increasing asset turnover, or leveraging assets more effectively.

The Dupont Corporation developed this analysis in the 1920s. The name has stuck with it ever since.

Formula
The Dupont Model equates ROE to profit margin, asset turnover, and financial leverage. The basic formula
looks like this.

Since each one of these factors is a calculation in and of itself, a more explanatory formula for this analysis
looks like this.

Every one of these accounts can easily be found on the financial statements. Net income and sales appear on the
income statement, while total assets and total equity appear on the balance sheet.

Analysis
This model was developed to analyze ROE and the effects different business performance measures have on this
ratio. So investors are not looking for large or small output numbers from this model. Instead, they are looking
to analyze what is causing the current ROE. For instance, if investors are unsatisfied with a low ROE, the
management can use this formula to pinpoint the problem area whether it is a lower profit margin, asset
turnover, or poor financial leveraging.

Once the problem area is found, management can attempt to correct it or address it with shareholders. Some
normal operations lower ROE naturally and are not a reason for investors to be alarmed. For instance,
accelerated depreciation artificially lowers ROE in the beginning periods. This paper entry can be pointed out
with the Dupont analysis and shouldn't sway an investor's opinion of the company.

Example
Let's take a look at Sally's Retailers and Joe's Retailers. Both of these companies operate in the same apparel
industry and have the same return on equity ratio of 45 percent. This model can be used to show the strengths
and weaknesses of each company. Each company has the following ratios:

Ratio Sally Joe

Profit Margin 30% 15%
Total Asset Turnover .50 6.0
Financial Leverage 3.0 .50

As you can see, both companies have the same overall ROE, but the companies' operations are completely
different.

Sally's is generating sales while maintaining a lower cost of goods as evidenced by its higher profit margin.
Sally's is having a difficult time turning over large amounts of sales.

Joe's business, on the other hand, is selling products at a smaller margin, but it is turning over a lot of products.
You can see this from its low profit margin and extremely high asset turnover.

This model helps investors compare similar companies like these with similar ratios. Investors can then apply
perceived risks with each company's business model.

Return on Equity (ROE): Return on equity (ROE) is a measure of profitability

that calculates how many dollars of profit a company generates with each dollar of shareholders' equity. The
formula for ROE is:

ROE = Net Income/Shareholders' Equity

ROE is sometimes called "return on net worth."

How it works (Example): Let's assume Company XYZ generated $10 million in net income last
year. If Company XYZ's shareholders' equity equaled $20 million last year, then using the ROE formula, we
can calculate Company XYZ's ROE as:

ROE = $10,000,000/$20,000,000 = 50%

This means that Company XYZ generated $0.50 of profit for every $1 of shareholders' equity last year, giving
the stock an ROE of 50%.
Why it Matters: ROE is more than a measure of profit; it's a measure of efficiency. A rising ROE
suggests that a company is increasing its ability to generate profit without needing as much capital. It also
indicates how well a company's management is deploying the shareholders' capital. In other words, the higher
the ROE the better. Falling ROE is usually a problem. However, it is important to note that if the value of the
shareholders' equity goes down, ROE goes up. Thus, write-downs and share buybacks can artificially boost
ROE. Likewise, a high level of debt can artificially boost ROE; after all, the more debt a company has, the less
shareholders' equity it has (as a percentage of total assets), and the higher its ROE is.Some industries tend to
have higher returns on equity than others. As a result, comparisons of returns on equity are generally most
meaningful among companies within the same industry, and the definition of a "high" or "low" ratio should be
made within this context.

Financial Analysis: Solvency vs. Liquidity Ratios

Solvency and liquidity are both terms that refer to an enterprise's state of financial health, but with some notable
differences. Solvency refers to an enterprise's capacity to meet its long-term financial commitments. Liquidity
refers to an enterprise's ability to pay short-term obligations; the term also refers to a company's capability to
sell assets quickly to raise cash. A solvent company is one that owns more than it owes; in other words, it has a
positive net worth and a manageable debt load. On the other hand, a company with adequate liquidity may have
enough cash available to pay its bills, but it may be heading for financial disaster down the road.

Solvency and liquidity are equally important, and healthy companies are both solvent and possess adequate
liquidity. A number of liquidity ratios and solvency ratios are used to measure a company's financial health, the
most common of which are discussed below. (See also: What Is the Best Measure of a Company's Financial
Health?)

Liquidity Ratios
Current ratio = Current assets / Current liabilities

The current ratio measures a company's ability to pay off its current liabilities (payable within one year) with its
current assets such as cash, accounts receivable and inventories. The higher the ratio, the better the company's
liquidity position.

Quick ratio = (Current assets Inventories) / Current liabilities

= (Cash and equivalents + Marketable securities + Accounts receivable) / Current liabilities

The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets and
therefore excludes inventories from its current assets. It is also known as the "acid-test ratio."

Days sales outstanding (DSO) = (Accounts receivable / Total credit sales) x Number of days in sales

DSO refers to the average number of days it takes a company to collect payment after it makes a sale. A higher
DSO means that a company is taking unduly long to collect payment and is tying up capital in receivables.
DSOs are generally calculated quarterly or annually. (To learn more, check out Liquidity Measurement Ratios.)

Solvency Ratios
Debt to equity = Total debt / Total equity
This ratio indicates the degree of financial leverage being used by the business and includes both short-term and
long-term debt. A rising debt-to-equity ratio implies higher interest expenses, and beyond a certain point, it may
affect a company's credit rating, making it more expensive to raise more debt.

Debt to assets = Total debt / Total assets

Another leverage measure, this ratio quantifies the percentage of a company's assets that have been financed
with debt (short-term and long-term). A higher ratio indicates a greater degree of leverage, and consequently,
financial risk.

Interest coverage ratio = Operating income (or EBIT) / Interest expense

This ratio measures the company's ability to meet the interest expense on its debt with its operating income,
which is equivalent to its earnings before interest and taxes (EBIT). The higher the ratio, the better the
company's ability to cover its interest expense. (For further reading, see Analyzing Investments With Solvency
Ratios.)

Calculating Liquidity and Solvency Ratios

Let's use a couple of these liquidity and solvency ratios to demonstrate their effectiveness in assessing a
company's financial condition.

Consider two companies Liquids Inc. and Solvents Co. with the following assets and liabilities on their
balance sheets (figures in millions of dollars). We assume that both companies operate in the same manufacturing sector, i.e.
industrial glues and solvents.

Balance Sheet (in millions of dollars) Liquids Inc. Solvents Co.

Cash $5 $1
Marketable securities $5 $2
Accounts receivable $10 $2
Inventories $10 $5
Current assets (a) $30 $10
Plant & equipment (b) $25 $65
Intangible assets (c) $20 $0
Total assets (a + b + c) $75 $75
Current liabilities* (d) $10 $25
Long-term debt (e) $50 $10
Total liabilities (d + e) $60 $35
Shareholders' equity $15 $40

*In our example, we assume that "current liabilities" only consist of accounts payable and other liabilities, with
no short-term debt. Since both companies are assumed to have only long-term debt, this is the only debt
included in the solvency ratios shown below. If they did have short-term debt (which would show up in current
liabilities), this would be added to long-term debt when computing the solvency ratios. (See also: Financial
Statements: Long-Term Liabilities.)

Liquids Inc.
Current ratio = $30 / $10 = 3.0

Quick ratio = ($30 $10) / $10 = 2.0

Debt to equity = $50 / $15 = 3.33

Debt to assets = $50 / $75 = 0.67

Solvents Co.

Current ratio = $10 / $25 = 0.40

Quick ratio = ($10 $5) / $25 = 0.20

Debt to equity = $10 / $40 = 0.25

Debt to assets = $10 / $75 = 0.13

Scenario Analysis Comparing Ratios

We can draw a number of conclusions about the financial condition of these two companies from these ratios.

Liquids Inc. has a high degree of liquidity. Based on its current ratio, it has $3 of current assets for every dollar
of current liabilities. Its quick ratio points to adequate liquidity even after excluding inventories, with $2 in
assets that can be converted rapidly to cash for every dollar of current liabilities. However, financial leverage
based on its solvency ratios appears quite high. Debt exceeds equity by more than three times, while two-thirds
of assets have been financed by debt. Note as well that close to half of non-current assets consists of intangible
assets (such as goodwill and patents). As a result, the ratio of debt to tangible assets calculated as ($50/$55)
is 0.91, which means that over 90% of tangible assets (plant and equipment, inventories, etc.) have been
financed by borrowing. To summarize, Liquids Inc. has a comfortable liquidity position, but it has a
dangerously high degree of leverage.

Solvents Co. is in a different position. The company's current ratio of 0.4 indicates an inadequate degree of
liquidity with only 40 cents of current assets available to cover every $1 of current liabilities. The quick ratio
suggests an even more dire liquidity position, with only 20 cents of liquid assets for every $1 of current
liabilities. But financial leverage appears to be at comfortable levels, with debt at only 25% of equity and only
13% of assets financed by debt. Even better, the company's asset base consists wholly of tangible assets, which
means that Solvents Co.'s ratio of debt to tangible assets is about one-seventh that of Liquids Inc.
(approximately 13% vs. 91%). Overall, Solvents Co. is in a dangerous liquidity situation, but it has a
comfortable debt position. (For more, check out the video, Explaining Tangible vs. Intangible Assets.)

Liquidity Crisis and Insolvency Risk

A liquidity crisis can arise even at healthy companies if circumstances arise that make it difficult for them to
meet short-term obligations such as repaying their loans and paying their employees. The best example of such
a far-reaching liquidity catastrophe in recent memory is the global credit crunch of 2007-09. Commercial paper
short-term debt that is issued by large companies to finance current assets and pay off current liabilities
played a central role in this financial crisis. A near-total freeze in the $2 trillion U.S. commercial paper market
made it exceedingly difficult for even the most solvent companies to raise short-term funds at that time and
hastened the demise of giant corporations such as Lehman Brothers and General Motors Company (GM
General Motors Co
GM
43.45
+3.08%
).

But unless the financial system is in a credit crunch, a company-specific liquidity crisis can be resolved
relatively easily with a liquidity injection, as long as the company is solvent. This is because the company can
pledge some assets if required to raise cash to tide over the liquidity squeeze. This route may not be available
for a company that is technically insolvent, since a liquidity crisis would exacerbate its financial situation and
force it into bankruptcy.

Insolvency, however, indicates a more serious underlying problem that generally takes longer to work out, and it
may necessitate major changes and radical restructuring of a company's operations. Management of a company
faced with insolvency will have to make tough decisions to reduce debt, such as closing plants, selling off assets
and laying off employees.

Going back to the earlier example, although Solvents Co. has a looming cash crunch, its low degree of leverage
gives it considerable "wiggle room." One available option is to open a secured credit line by using some of its
non-current assets as collateral, thereby giving it access to ready cash to tide over the liquidity issue. Liquids
Inc., while not facing an imminent problem, could soon find itself hampered by its huge debt load, and it may
need to take steps to reduce debt as soon as possible. (See also: What Is Liquidity Risk?)

Reading Ratios Lessons for Investors

The following points should be borne in mind when using solvency and liquidity ratios:

Get the Complete Financial Picture: Use both sets of ratios liquidity and solvency to get the
complete picture of a company's financial health, since making this assessment on the basis of just one
set of ratios may provide a misleading depiction of its finances.
Compare Apples to Apples: These ratios vary widely from industry to industry, so ensure that you're
comparing apples to apples. A comparison of financial ratios for two or more companies would only be
meaningful if they operate in the same industry.
Evaluate the Trend: Analyzing the trend of these ratios over time will enable you to see if the company's
position is improving or deteriorating. Pay particular attention to negative outliers to check if they are
the result of a one-time event or indicate a worsening of the company's fundamentals.

The Bottom Line

Solvency and liquidity are both equally important for a company's financial health. A number of financial ratios
are used to measure a company's liquidity and solvency, and an investor should use both sets to get the complete
picture of a company's financial position. Additional useful information can be gleaned by comparing a
company's ratios versus its peers and by analyzing ratio trends. (For additional reading, check out How to
Analyze a Company's Financial Position.)
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Activity Ratio Analysis

General information on the activity ratio analysis
To understand if the companys use of assets and process of running the operations are efficient or not, the
activity ratio analysis is applied. Also referred as operation ratio analysis, or turnover ratio analysis, it includes
calculating a set of indicators that allow making conclusions on how effectively the firm uses its inventories,
accounts receivable and fixed assets.

Activity ratio calculation and analysis

Total Asset Turnover: A ratio that measures the assets activity and firms ability of generating
sales through its assets is total asset turnover. To compute it the net sales have to be
divided by average total assets:

Total Asset Turnover = Net Sales Average Total Assets

It is obvious, that the higher this ratio, the better it is for a firm because this means it can generate more sales
with some certain level of assets. Total asset turnover ratio can be compared with other similar-sized companies
within the industry; the comparison with different industries businesses or noticeably smaller or greater firms
wouldnt be adequate.

Current asset turnover

Similar to total asset turnover is current asset turnover ratio. The difference is that current asset turnover is
measuring firms ability of sales generation from its current assets, such as cash, inventory, accounts receivable,
etc.:

Current Asset Turnover = Net Sales Average Current Assets

Bigger values for this ratios are preferable because this means the ability of generating more sales from some
certain amount of current assets.

Working Capital Turnover (Sales to Working Capital)

The working capital turnover ratio, which is also being calculated while performing the liquidity analysis, has
the following formula:

Sales to Working Capital = Sales Average Working Capital

This ratio measures the amount of cash needed to generate a certain level of sales. Considering this, high
working capital most likely indicates a working capital profitable use. In other words, sales should be adequate
in relation to the working capital available. However, a comparison with other similar companies or industry
average should be made before drawing any conclusions.

Accounts Receivable Turnover

To measure how many times accounts receivable can be turned by a company into cash, we should calculate the
accounts receivable turnover ratio. This ratio indicating the liquidity of the accounts receivable can be computed
as follows:

Accounts Receivable Turnover (Times) = Net Sales Average Net Receivables

The results of the calculations may be presented either in times per year or in days. If measured in times per
year, the decreasing trend of this ratio would be negative for a company, meaning the ability to turn accounts
receivable into cash has become lower. However, when measured in days, the decreasing trend of this ratio is
desirable, because it would mean fewer days are needed to turn the receivables into cash. The formula for the
calculation of the accounts receivable in days is slightly different:

Accounts Receivable Turnover (Days) = Average Gross Receivables (Net Sales 360)

Often referred as average collection period, the accounts receivable turnover in days can also be computed as
follows:

Average Collection Period (Accounts Receivable Turnover in Days) = 360 Accounts Receivable Turnover
(Times)

Basically, this indicator is measuring the number of days between the date credit sale has been made and the
day, when the money has been received from buyer.

Accounts payable turnover

This is another ratio that can be used for performing the activity analysis of a firm. In opposition to accounts
receivable turnover, this ratio measures the number of times per year a company pays its debt to suppliers
(creditors). It can be calculated as follows:

Accounts payable turnover (Times) = Cost of goods sold Accounts payable

Higher accounts payable turnover ratio indicates the ability of a firm to pay its debt to creditors frequently and
regularly. The alternative formula for this ratio is as follows:

Accounts Payable Turnover = Purchases Average Accounts Payable

Days Payable Outstanding

To measure the number of days that is averagely needed by a firm to pay the debt to its creditors, the days
payable outstanding ratio is being computed. This can be done with use of the following formula:

Days Payable Outstanding = Accounts payable Average daily cost of sales

Generally, the low value of this ratio means efficient working capital usage. However, greater days payable
outstanding ratio not necessarily indicates the bad position of a firm, because delaying payments to suppliers to
the very last date can be made by a company regularly in order to shorten the cash converting cycle. Thus, the
analysis should include reviewing the liquidity ratios too, because high days payable outstanding ratio and, at
the same time, bad liquidity position of a company would indicate that it has problems paying its debt to
creditors.

Inventory turnover (Days Inventory Outstanding)

This ratio indicates how many days a firm usually needs to turn inventory into sales. The computation formula
is as follows:

Inventory turnover (days inventory outstanding) = Cost of Goods Sold Average Inventory
Lower inventory turnover ratio would indicate that less time is needed for a company to turn the inventory to
sales. Commonly, the decreasing trend of companys inventory turnover indicates its working capital
improvement.

A formula for the computation of this ratio measured in days is as follows:

Inventory Turnover in Days = Average Inventory Cost of Goods Sold 365

This formula calculates a certain number of days needed for the inventory of a firm to be converted to cash.
There is also an alternative formula for this ratio:

Inventory Turnover in Days = 360 Inventory turnover (Days Inventory Outstanding)

Cash Turnover

The efficiency of companys usage of cash is indicated by the cash turnover ratio. It measures a number of times
that the firms cash has been spent through over some period. The formula for calculating this ratio is as
follows:

Cash Turnover = Sales Average Cash and Cash Equivalents

Normally, the high value of this ratio is considered to be better, because this would mean that the company is
using its cash effectively and turning it over more frequently. However, in some cases high value of this ratio
ratio can indicate that the firm has insufficient funds and may soon require short-term financing. An alternative
formula for this ratio also includes marketable securities to the calculation:

Cash Turnover = Sales Average Cash and Cash Equivalents and Marketable Securities

Operating Cycle

Operating cycle is the number of days needed by a company to turn its inventories to cash. In other words, it is a
period between the date goods are acquired and the date of cash realization from sales. Normally, the operating
cycle of a business lasts less than a year, however, exceptions exist. Operating cycle computation formula is as
follows:

Operating Cycle = Accounts Receivable Turnover in Days + Inventory Turnover in Days

Cash Conversion Cycle

Another measurement of companys working capital use efficiency is the cash conversion cycle. It is defined as
a number of days needed by a company for revenue generation from its assets. It is also often referred as net
operating cycle and can be calculated with use of the following formula:

Cash Conversion Cycle = Inventory Conversion Period + Receivables Conversion Period - Payables
Conversion Period

Divided into three stages, the calculation of the cash conversion cycle includes the following:

measuring the time, needed by a firm to get materials, produce and sell the ready product;
measuring the time, needed by a firm to collect the cash for goods sold (accounts receivable);
measuring the time, needed by a firm to pay the debt to its suppliers.
Summary
The activity ratio analysis is being applied for the measurement of the companys working capital usage
efficiency. Activity ratios indicate if a firm manages its inventories, cash, receivables and payables and other
assets well.

Valuation Ratios: Price/Earnings Ratio

The price/earnings ratio (P/E) is the best known of the investment valuation indicators. The P/E ratio has its
imperfections, but it is nevertheless the most widely reported and used valuation by investment professionals
and the investing public. The financial reporting of both companies and investment research services use a basic
earnings per share (EPS) figure divided into the current stock price to calculate the P/E multiple (i.e. how many
times a stock is trading (its price) per each dollar of EPS).

It's not surprising that estimated EPS figures are often very optimistic during bull markets, while reflecting
pessimism during bear markets. Also, as a matter of historical record, it's no secret that the accuracy of stock
analyst earnings estimates should be looked at skeptically by investors. Nevertheless, analyst estimates and
opinions based on forward-looking projections of a company's earnings do play a role in Wall Street's stock-
pricing considerations.

Historically, the average P/E ratio for the broad market has been around 15, although it can fluctuate
significantly depending on economic and market conditions. The ratio will also vary widely among different
companies and industries.

Formula:

Components:

The dollar amount in the numerator is the closing stock price for Zimmer Holdings as of December 31, 2005 as
reported in the financial press or over the Internet in online quotes. In the denominator, the EPS figure is
calculated by dividing the company's reported net earnings (income statement) by the weighted average number
of common shares outstanding (income statement) to obtain the $2.96 EPS figure. By simply dividing, the
equation gives us the P/E ratio that indicates (as of Zimmer Holdings' 2005 fiscal yearend) its stock (at $67.44)
was trading at 22.8-times the company's basic net earnings of $2.96 per share. This means that investors would
be paying $22.80 for every dollar of Zimmer Holdings' earnings.

Variations:
The basic formula for calculating the P/E ratio is fairly standard. There is never a problem with the numerator -
an investor can obtain a current closing stock price from various sources, and they'll all generate the same dollar
figure, which, of course, is a per-share number.

However, there are a number of variations in the numbers used for the EPS figure in the denominator. The most
commonly used EPS dollar figures include the following:
 Basic earnings per share - based on the past 12 months as of the most recent reported quarterly net
income. In investment research materials, this period is often identified as trailing twelve months
(TTM). As noted previously, diluted earnings per share could also be used, but this is not a common
practice. The term "trailing P/E" is used to identify a P/E ratio calculated on this basis.
Estimated basic earnings per share - based on a forward 12-month projection as of the most recent
quarter. This EPS calculation is not a "hard number", but rather an estimate generated by investment
research analysts. The term, estimated P/E ratio, is used to identify a P/E ratio calculated on this basis.
The Value Line Investment Survey's combination approach - This well-known and respected
independent stock research firm has popularized a P/E ratio that uses six months of actual trailing EPS
and six months of forward, or estimated, EPS as its earnings per share component in this ratio.
Cash Earnings Per Share - Some businesses will report cash earnings per share, which uses operating
cash flow instead of net income to calculate EPS.
Other Earnings Per Share - Often referred to as "headline EPS", "whisper numbers", and "pro forma",
these other earnings per shares metrics are all based on assumptions due to special circumstances. While
the intention here is to highlight the impact of some particular operating aspect of a company that is not
part of its conventional financial reporting, investors should remember that the reliability of these forms
of EPS is questionable.

Commentary:
A stock with a high P/E ratio suggests that investors are expecting higher earnings growth in the future
compared to the overall market, as investors are paying more for today's earnings in anticipation of future
earnings growth. Hence, as a generalization, stocks with this characteristic are considered to be growth stocks.
Conversely, a stock with a low P/E ratio suggests that investors have more modest expectations for its future
growth compared to the market as a whole.

The growth investor views high P/E ratio stocks as attractive buys and low P/E stocks as flawed, unattractive
prospects. Value investors are not inclined to buy growth stocks at what they consider to be overpriced values,
preferring instead to buy what they see as underappreciated and undervalued stocks, at a bargain price, which,
over time, will hopefully perform well.

Note: Though this indicator gets a lot of investor attention, there is an important problem that arises with this
valuation indicator and investors should avoid basing an investment decision solely on this measure. The ratio's
denominator (earnings per share) is based on accounting conventions related to a determination of earnings that
is susceptible to assumptions, interpretations and management manipulation. This means that the quality of the
P/E ratio is only as good as the quality of the underlying earnings number.

Whatever the limitations of the P/E ratio, the investment community makes extensive use of this valuation
metric. It will appear in most stock quote presentations on an updated basis, i.e., the latest 12-months earnings
(based on the most recent reported quarter) divided by the current stock price. Investors considering a stock
purchase should then compare this current P/E ratio against the stock's long-term (three to five years) historical
record. This information is readily available in Value Line or S&P stock reports, as well as from most financial
websites, such as Yahoo!Finance and MarketWatch.

It's also worthwhile to look at the current P/E ratio for the overall market (S&P 500), the company's industry
segment, and two or three direct competitor companies. This comparative exercise can help investors evaluate
the P/E of their prospective stock purchase as being in a high, low or moderate price range.
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Liquidity Ratios
Liquidity ratios analyze the ability of a company to pay off both its current liabilities as they become due as
well as their long-term liabilities as they become current. In other words, these ratios show the cash levels of a
company and the ability to turn other assets into cash to pay off liabilities and other current obligations.

Liquidity is not only a measure of how much cash a business has. It is also a measure of how easy it will be for
the company to raise enough cash or convert assets into cash. Assets like accounts receivable, trading securities,
and inventory are relatively easy for many companies to convert into cash in the short term. Thus, all of these
assets go into the liquidity calculation of a company.

Here are the most common liquidity ratios.

Quick Ratio
Acid Test Ratio
Current Ratio
Working Capital
Working Capital Ratio
Times Interest Earned Ratio

Financial Performance:
There are several ways of measuring financial performance of a company. Here we measure the financial
performance of RBBL through some important ratio analysis based on the information found in the annual
report.

1. Current Ratio: The current ratio, one of the most commonly cited financial ratios, measures the firms
ability to meet its short-term obligations. The higher the current ratio, the better the liquidity position of the
firm. It is expressed as
Current Ratio=Current Asset/Current Liabilities

2. Quick Ratio: Quick ratio or Acid Test ratio is the ratio of the sum of cash and cash equivalents, marketable
securities and accounts receivable to the current liabilities of a business. It measures the ability of a company to
pay its debts by using its cash and near cash current assets (i.e. accounts receivable and marketable securities).

3. Inventory turnover ratio: The formula for the inventory turnover ratio measures how well a company is
turning their inventory into sales. The costs associated with retaining excess inventory and not producing sales
can be burdensome. If the inventory turnover ratio is too low, a company may look at their inventory to
appropriate cost cutting.
The denominator of the formula, inventory is an average inventory for the period being analyzed. If monthly
sales are used.

4. Total asset Turnover: The total asset turnover ratio measures the ability of a company to use its assets to
efficiently generate sales. This ratio considers all assets, current and fixed. Those assets include fixed assets,
like plant and equipment, as well as inventory, accounts receivable, as well as any other current assets.
Total Asset Turnover= Sales/Total Asset

5. Debt Ratio: Debt ratio measures the percent of total funds provided by creditors. Debt includes both current
liabilities and long-term debt. Creditors prefer low debt ratios because the lower the ratio, the greater the
cushion against creditors losses in liquidation. Owners may seek high debt ratios, either to magnify earnings or
because selling new stock would mean giving up control. Owners want control while "using someone elses
money." Debt Ratio is best compared to industry data to determine if a company is possibly over or under
leveraged.
Debt ratio= Total Liabilities/Total Assets
6. Gross profit Margin: A company's total sales revenue minus its cost of goods sold, divided by the total sales
revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the
company retains after incurring the direct costs associated with producing the goods and services sold by a
company. The higher the percentage, the more the company retains on each dollar of sales to service its other
costs and obligations.

7. Operating profit margin ratio: Operating margin ratio or return on sales ratio is the ratio of operating
income of a business to its revenue. It is profitability ratio showing operating income as a percentage of
ravenous.

8. Net profit margin: The net profit margin formula looks at how much of a company's revenues are kept as net
income. The net profit margin is generally expressed as a percentage. Both net income and revenues can be
found on a company's income statement.
Net Profit Margin=Net profit/sales

9. Earnings per share(EPS): The portion of a company's profit allocated to each outstanding share of common
stock. Earnings per share serve as an indicator of a company's profitability.

10. Return on assets ROA: An indicator of how profitable a company is relative to its total assets. ROA
gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a
company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as
"return on investment".

11. Return on Equity (ROE): The amount of net income returned as a percentage of shareholders equity.
Return on equity measures a corporation's profitability by revealing how much profit a company generates with
the money shareholders have invested.

Industry Analysis: A market assessment tool designed to provide a business with an idea of the complexity of a
particular industry. Industry analysis involves reviewing the economic, political and market factors that
influence the way the industry develops. Major factors can include the power wielded by suppliers and buyers,
the condition of competitors, and the likelihood of new market entrants.

Potential competitor:

Rivalry among Established Companies:

The Bargaining Power of Buyers:

Bargaining Power of Suppliers:

Substitute Products:

SWOT analysis:

SWOT analysis is a process that identifies an organization's strengths, weaknesses, opportunities and threats.
SWOT analysis has always helped an organization to judge their performance in the same competitive market.
Here we will like to make an assessment through analysis.

Strength
Weakness

Opportunity

Threat