%%• A financial ratio shows the relationship between A financial ratio shows the relationship between

two financial measurestwo financial measures

• Developed by dividing one measure into anotherDeveloped by dividing one measure into another

• Provide insights into company’s operations and Provide insights into company’s operations and strategystrategy

• Four categories: liquidity, solvency, market value, Four categories: liquidity, solvency, market value, profitabilityprofitability

• Used internally to evaluate performance and set Used internally to evaluate performance and set goalsgoals

• Used externally to make investment decisionsUsed externally to make investment decisions

IntroductionIntroduction

%% Asset TurnoverAsset Turnover

““Reveals how effective assets are at Reveals how effective assets are at generating sales revenue.”generating sales revenue.”

Asset Turnover =Asset Turnover =salessales

assetsassets

%%““ROS indicates the percentage of each sales ROS indicates the percentage of each sales dollar that results in net income.”dollar that results in net income.”

Return on SalesReturn on Sales

Return on Sales =Return on Sales =net profitnet profit

net salesnet sales

%% Return on AssetsReturn on Assets

Return on Assets =Return on Assets =net profitnet profit

assetsassets

““ROA measures a company’s ability to use ROA measures a company’s ability to use all its assets to generate earnings.”all its assets to generate earnings.”

%% LeverageLeverage

Leverage =Leverage =assetsassets

equityequity

““Leverage shows the debt level of the Leverage shows the debt level of the organization.”organization.”

%% Return on EquityReturn on Equity

Return on Equity =Return on Equity =net profitnet profit

equityequity

““Return on Equity highlights for the Return on Equity highlights for the stockholders the return on their stockholders the return on their investment.”investment.”

%% Du Pont FormulaDu Pont Formula

Return on Equity =Return on Equity =net profitnet profit

equityequity

net profitnet profit

salessales

salessales

assetsassets

assetsassets

equityequityxxxx xxxx

%% Du Pont FormulaDu Pont Formula

Return on Equity =Return on Equity =net profitnet profit

equityequity

net profitnet profit

salessales

salessales

assetsassets

assetsassets

equityequityxxxx xxxx

%% Du Pont FormulaDu Pont Formula

Return on Equity =Return on Equity =net profitnet profit

equityequity

net profitnet profit

salessales

salessales

assetsassets

assetsassets

equityequityxxxx xxxx

Return on Return on SalesSales

Asset Asset TurnoverTurnover

LeverageLeverage

%% Du Pont Formula · TI vs. HPDu Pont Formula · TI vs. HP

Texas InstrumentsTexas Instruments Hewlett PackardHewlett Packard

Current AssetsCurrent Assets = 1.29= 1.29

Fixed Assets Fixed Assets = 1.11= 1.11

Sales Sales = 4.07= 4.07

Net Income Net Income = .37= .37

Shareholder Equity Shareholder Equity = 1.16= 1.16

%% Du Pont Formula · TI vs. HPDu Pont Formula · TI vs. HP

Texas InstrumentsTexas Instruments Hewlett PackardHewlett Packard

Current AssetsCurrent Assets = 1.29= 1.29

Fixed Assets Fixed Assets = 1.11= 1.11

Sales Sales = 4.07= 4.07

Net Income Net Income = .37= .37

Shareholder Equity Shareholder Equity = 1.16= 1.16

Turnover xTurnover x 1.691.69

ROS ROS 9.3% 9.3%

= ROA= ROA 15.7%15.7%

x Leveragex Leverage 2.072.07

= ROE= ROE 32.5%32.5%

%% Du Pont Formula · TI vs. HPDu Pont Formula · TI vs. HP

Texas InstrumentsTexas Instruments Hewlett PackardHewlett Packard

Current AssetsCurrent Assets = 1.29= 1.29

Fixed Assets Fixed Assets = 1.11= 1.11

Sales Sales = 4.07= 4.07

Net Income Net Income = .37= .37

Shareholder Equity Shareholder Equity = 1.16= 1.16

Current AssetsCurrent Assets = 1.49= 1.49

Fixed Assets Fixed Assets = .84= .84

Sales Sales = 3.09= 3.09

Net Income Net Income = .52= .52

Shareholder Equity Shareholder Equity = 1.54= 1.54

Turnover xTurnover x 1.691.69

ROS ROS 9.3% 9.3%

= ROA= ROA 15.7%15.7%

x Leveragex Leverage 2.072.07

= ROE= ROE 32.5%32.5%

%% Du Pont Formula · TI vs. HPDu Pont Formula · TI vs. HP

Texas InstrumentsTexas Instruments Hewlett PackardHewlett Packard

Current AssetsCurrent Assets = 1.29= 1.29

Fixed Assets Fixed Assets = 1.11= 1.11

Sales Sales = 4.07= 4.07

Net Income Net Income = .37= .37

Shareholder Equity Shareholder Equity = 1.16= 1.16

Current AssetsCurrent Assets = 1.49= 1.49

Fixed Assets Fixed Assets = .84= .84

Sales Sales = 3.09= 3.09

Net Income Net Income = .52= .52

Shareholder Equity Shareholder Equity = 1.54= 1.54

Turnover xTurnover x 1.691.69

ROS ROS 9.3% 9.3%

= ROA= ROA 15.7%15.7%

x Leveragex Leverage 2.072.07

= ROE= ROE 32.5%32.5%

Turnover xTurnover x 1.331.33

ROSROS 16.9%16.9%

= ROA= ROA 22.4%22.4%

x Leveragex Leverage 1.521.52

= ROE= ROE 33.8%33.8%

%% Porter CurvePorter Curve

ROIROI

Market ShareMarket Share

HighHigh

HighHighLowLow

%% Porter CurvePorter Curve

ROIROI

Market ShareMarket Share

HighHigh

HighHighLowLow

%%ROIROI

Market ShareMarket Share

HighHigh

HighHighLowLow

Porter CurvePorter Curve