RATIO ANALYSIS

Financial Analysis

Assessment of the firms past, present and future financial conditions Done to find firms financial strengths and weaknesses Primary Tools:
Financial

Statements Comparison of financial ratios to past, industry, sector and all firms

Objectives of Ratio Analysis

Standardize financial information for comparisons Evaluate current operations Compare performance with past performance Compare performance against other firms or industry standards Study the efficiency of operations Study the risk of operations

Uses for Ratio Analysis

Evaluate Bank Loan Applications Evaluate Customers Creditworthiness Assess Potential Merger Candidates Analyze Internal Management Control Analyze and Compare Investment Opportunities

Types of Ratios

Financial Ratios:

Liquidity Ratios

Assess ability to cover current obligations Assess ability to cover long term debt obligations

Leverage Ratios

Operational Ratios:

Activity (Turnover) Ratios

Assess amount of activity relative to amount of resources used Assess profits relative to amount of resources used

Profitability Ratios

Liquidity Ratios

Current Ratio

Current Assets / Current Liabilities

Current Assets include Cash, Marketable Securities, Accounts Receivable and Inventory Current Liabilities include Accounts Payable, Debt Due within one year, and Other Current Liabilities

Current Assets 1870.92 Current Ratio 1.2 : 1 Current Liabilities 1555.75

Liquidity Ratios

Quick Ratio or Acid Test

Current Assets minus Inventory / Current Liabilities A more precise measure of liquidity, especially if inventory is not easily converted into cash.

Current Assets - Inventory 720.53 Quick Ratio 0.46 : 1 Current Liabilities 1555.75

Leverage Ratios

Leverage ratios measure the extent to which a firm has been financed by debt. Leverage ratios include: Debt Ratio Debt--Equity Ratio Generally, the higher this ratio, the more risky a creditor will perceive its exposure in your business. Thus, high leverage ratios make it more difficult to obtain credit (loans).

Leverage Ratios Cont.

In contrast to the leverage ratios discussed on previous slide, the higher the Interest Coverage Ratio (Times-Interest-Earned Ratio), the more credit worthy the firm is, and the easier it will be to obtain credit (loans).

Total Debt Ratio

Proportion of interest bearing debt in the Capital structure. In general, the lower the number, the better.

Total Debt 1,229.06 Debt Ratio 0.646 Net Assets 1901.87

Debt-Equity Ratio

The Debt-Equity Ratio indicates the percentage of total funds provided by creditors versus by owners. This ratio indicates the extent to which the business relies on debt financing (creditor money versus owners equity).
Total Debt 1,229.06 Debt Equity Ratio 1.83 Net Worth 972.81

Interest Coverage Ratio

interest coverage ratio indicates the extent to which earnings can decline without the firm becoming unable to meet its annual interest costs. Also called the Times-Interest-Earned Ratio, this calculation shows how many times the firm could pay back (or cover) its annual interest expenses out of earnings before interest and taxes (EBIT).

EBIT 342.61 Interest Coverage Ratio 2.4 Interest 143.46

Interest Coverage Ratio

EBIT 342.61 41.59 Interest Coverage Ratio 2.7 Interest 143.46

Activity Ratios

Activity ratios measure how effectively a firm is using its resources, or how efficient a company is in its operations and use of assets. In general, the higher the ratio, the better. Activity ratios include: Inventory turnover Accounts receivable turnover Average collection period. Total assets turnover (Capital Turnover)

Inventory Turnover Ratio

The inventory turnover ratio indicates how fast a firm is selling its inventories This ratio indicates how well inventory is being managed, which is important because the more times inventory can be turned (i.e., the higher the turnover rate) in a given operating cycle, the greater the profit.
Inventory Turnover Ratio Cost of Goods Sold 3,053.66 8.6 Avg Inventory (244.26 7461.81) / 2 360 42 days InventoryTurnover

Days of InventoryHolding

Inventory Turnover Ratio Cont.

In

the absence of information. Instead of COGS we can use Sales In the case of COGS and Inventory both are valued at cost. While the sales are valued at market prices Therefore better to use COGS

Accounts Receivable Turnover

The accounts receivable turnover ratio, indicates the average length of time it takes a firm to collect credit sales (in percentage terms), i.e., how well accounts receivable are being collected. If receivables are excessively slow in being converted to cash, liquidity could be severely impaired.
Credit Sales A R Turnover Avg AR Sales 3,717.23 7.7 Avg AR 483.18

Average Collection Period (Receivable Turnover in Days)

The average collection period is the average length of time (in days) it takes a firm to collect on credit sales.

360 ACP 47 days AR Turnover

Total Assets Turnover

The total assets turnover ratio, indicates how efficiently a firm is using all its assets to generate revenues. This ratio helps to signal whether a firm is generating a sufficient volume of business for the size of its asset investment

Total Assets Turnover

NetSales 3,717.23 1.95 times Total Assets 1901.87

Profitability Ratios

Profitability ratios measure managements overall effectiveness as shown by returns generated on sales and investment.

Profitability ratios include

Gross profit margin Operating profit margin Net profit margin Return on total assets (ROA) Return on stockholders equity (ROE)

Gross Profit Margin

The gross profit margin is the total margin available to cover operating expenses and yield a profit. This ratio indicates how efficiently a business is using its labor and materials in the production process, and shows the percentage of net sales remaining after subtracting cost of goods sold. The higher the ratio, the better. A high gross profit margin indicates that a firm can make a reasonable profit on sales, as long as it keeps overhead costs under control.
GP Margin Gross Profit 663.57 0.179 or 17.9% Sales 3,717.23

Net Profit Margin

Measures the profitability with respect to sales generated

Net Profit Margin

Net Profit 663.57 0.179 or 17.9% Sales 3,717.23

Return On Assets or Return on Investment

ROA Net Profit Margin Total Asset Turnover Net Income Sales Sales Total Assets
Return on Assets is affected by two areas of operations. The Profit Margin measures the degree to which the firm controls expenses. Since expenses comprise the difference between Sales and Net Income, lowering the expenses taken out of each dollar of sales raises the Profit Margin. At the same time, Return on Assets can be raised by producing sales by using fewer assets. Asset Turnover measures the dollar of sales produced with each dollar invested in assets. This is often thought of as sales volume. Different industries achieve ROA in different ways. Some have low profit margins but high volume, e.g. grocery stores. Others have lower volume but are able to maintain higher profit margins, e.g. car dealerships.

Return on Equity
ROE Profit Margin Total Asset Turnover Equity Multiplier Net Income Sales Total Assets Sales Total Assets Common Equity
Measures earning power on shareholders book-value investment