3-0 ratio analysis 3.3 ratios also allow for better comparison through time or between companies as...

3-1

Ratio Analysis 3.3

• Ratios also allow for better comparison through time or between companies

• As we look at each ratio, ask yourself what the ratio is trying to measure and why is that information important

• Ratios are used both internally and externally

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Categories of Financial Ratios

• Short-term solvency or liquidity ratios

• Long-term solvency or financial leverage ratios

• Asset management or turnover ratios

• Profitability ratios

• Market value ratios

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3-3

Computing Liquidity Ratios

• Current Ratio = CA / CL• 1,801,690 / 1,780,785 = 1.01 times

• Quick Ratio = (CA – Inventory) / CL• (1,801,690 – 388,947) / 1,780,785 = .793

times

• Cash Ratio = Cash / CL• 3,171 / 1,780,785 = .002 times• Cash means cash + cash equivalents

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Computing Long-term Solvency Ratios

• Total Debt Ratio = (TA – TE) / TA• (4,931,444 – 1,761,044) / 4,931,444 = .6429

times or 64.29%• The firm finances a little over 64% of its assets

with debt.

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Long-Term Solvency Ratios continued

• Debt/Equity = TD / TE• (4,931,444 – 1,761,044) / 1, 761,044 = 1.800

times

• Equity Multiplier = TA / TE = 1 + D/E• 1 + 1.800 = 2.800

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Computing Coverage Ratios

• Times Interest Earned = EBIT / Interest• 820,183 / 52,841 = 15.5 times

• Cash Coverage =

(EBIT + Depreciation) / Interest• (820,183 + 362,325) / 52,841 = 22.38 times

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3-7

Computing Inventory Ratios

• Inventory Turnover =

Cost of Goods Sold / Inventory• 1,762,721 / 388,947 = 4.53 times

• Days’ Sales in Inventory =

365 / Inventory Turnover• 365 / 4.53 = 81 days

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3-8

Computing Receivables Ratios

• Receivables Turnover =

Sales / Accounts Receivable• 4,335,491 / 1,095,118 = 3.96 times

• Days’ Sales in Receivables =

365 / Receivables Turnover• 365 / 3.96 = 92 days

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3-9

Computing Total Asset Turnover

• NWC Turnover = Sales / NWC• 4,335,491 / (1,801,690 - 1,780,785) = 207.390

times

• Fixed Asset Turnover = Sales / Net Fixed Assets• 4,335,491 / 3,129,754 = 1.385 times

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Asset Turnover Ratios continued

• Total Asset Turnover =

Sales / Total Assets• 4,335,491 / 4,931,444 = .88 times

• Measure of asset use efficiency

• Not unusual for TAT < 1, especially if a firm has a large amount of fixed assets

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Computing Profitability Measures

• Profit Margin = Net Income / Sales• 471,916 / 4,335,491 = .1088 times or 10.88%

• Return on Assets (ROA) =

Net Income / Total Assets• 471,916 / 4,931,444 = .0957 times or 9.57%

• Return on Equity (ROE) =

Net Income / Total Equity• 471,916 / 1,761,044 = .2680 times or 26.8%

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3-12

Computing Market Value Measures

• Market Price of Stock = $60.98 per share

• Shares outstanding = 205,838,910

• Market Value of LTD = $1,461,874,980

• EPS = Net Income / Shares Outstanding• 471,916,000 / 205,838,910 = 2.29

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Market Value Measures Continued

• PE Ratio = Price per share / Earnings per share• 60.98 / 2.29 = 26.6 times

• PEG Ratio = PE ratio / expected earnings growth rate

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Market Value Ratios continued

• Market-to-book ratio = Market Value Per Share / Book Value Per Share• 60.98 / (1,761,044,000 / 205,838,910) = 7.1

times

• Enterprise Value (EV) / EBITDA =(Market Value of Equity + Market Value of

Debt + Preferred Shares + Minority Interest – Cash & Equivalents) / EBITDA

• (60.98 x 205,838,910 + 1,461,874,980 – 3,171,000) / (820,183,000 + 362,325,000) = 11.85 times

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Table 3.8 – Common Financial Ratios

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Table 3.8 – Common Financial Ratios

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