Beruflich Dokumente
Kultur Dokumente
CHAPTER 3
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LO1
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LO1
Trend Analysis
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LO2
Rate of Return
Rate of = Return Amount of Return Amount of Investment
This ratio provides the return on a given investment alternative. All other things being equal, the higher the rate of return, the more profitable the alternative. The rate of return calculation is derived from the interest calculation.
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LO2
This ratio describes the rate of return management was able to earn on the assets that it had available during the year. An informed judgment about the firms profitability requires relating net income to the assets used to generate that net income.
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LO3
The DuPont Model is an expansion of the basic ROI calculation. The developers of the model reasoned that profitability from sales and utilization of assets to generate sales revenue were both important factors to be considered when evaluating profitability.
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LO3
Sales Average Total Assets Turnover Relates efficiency with which the firms assets are used in the revenuegenerating process.
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LO3
A rule of thumb useful for putting ROI in perspective is that average ROI, based on net income, for most American merchandising and manufacturing companies is between 8% and 12%.
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LO4
Return on Equity
Return on = Equity Net Income Average Owners Equity
Owners are interested in expressing the profits of the firm as a rate of return on the amount of owners equity. As a rule of thumb, average ROE for most American merchandising and manufacturing companies has historically ranged from 10% to 15%.
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LO5
Working Capital
Current assets
- Current liabilities
Working capital
Working capital is the excess of a firms current assets over its current liabilities.
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LO6
Current Ratio
Current Ratio = Current Assets Current Liabilities
This ratio measures the ability of the company to pay current debts as they become due.
As a rule of thumb, a current ratio of 2.0 is considered indicative of adequate liquidity.
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LO6
Acid-Test Ratio
Acid-Test = Ratio Quick Assets Current Liabilities
Quick assets are cash (including temporary cash investments) and accounts receivable.
This ratio provides information about an almost worstcase situationthe firms ability to meet its current obligations even if none of the inventory can be sold. As a rule of thumb, an acid-test ratio of 1.0 is considered indicative of adequate liquidity.
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LO7
Trend Analysis
Berry Products Income Information For the Years Ended December 31
Year 2007 2006 2005 2004 2003 18.50% 19.40% 22.50% 22.10% 20.60% 26.50% 27.50% 33.20% 34.30% 33.40% $ 15,752 $ 8,523 $ 7,950 $ 8,625 $ 6,745
This table illustrates the trend analysis of return on investment, return on equity and working capital.
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LO7
Trend Analysis
Return on Investment Return on Equity
40.00%
Return (%)
30.00% 20.00% 10.00% 0.00% 2003 2004 2005 Year 2006 2007
We can use the trend analysis to construct graphs so we can see trends over time.
$20,000 $15,000 $10,000 $5,000 $0 2003 2004 2005 Year 2006 2007
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End of Chapter 3
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