chapter 2 financial ratio analysis. 2-2 example 2.1 problem rylan enterprises has 5 million shares...

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Chapter 2 Financial Ratio Analysis

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Page 1: Chapter 2 Financial Ratio Analysis. 2-2 Example 2.1 Problem  Rylan Enterprises has 5 million shares outstanding.  The market price per share is $22

Chapter 2

Financial Ratio Analysis

Page 2: Chapter 2 Financial Ratio Analysis. 2-2 Example 2.1 Problem  Rylan Enterprises has 5 million shares outstanding.  The market price per share is $22

2-2

Example 2.1

• Problem

Rylan Enterprises has 5 million shares outstanding.

The market price per share is $22.

The firm’s book value of equity is $50 million.

What is Rylan’s market capitalization?

How does the market capitalization compare to Rylan’s book value of equity?

Page 3: Chapter 2 Financial Ratio Analysis. 2-2 Example 2.1 Problem  Rylan Enterprises has 5 million shares outstanding.  The market price per share is $22

2-3

Example 2.1

• Solution

Rylan’s market capitalization is $110 million

• 5 million shares × $22 share = $110 million.

• The market capitalization is significantly higher than Rylan’s book value of equity of $50 million.

Page 4: Chapter 2 Financial Ratio Analysis. 2-2 Example 2.1 Problem  Rylan Enterprises has 5 million shares outstanding.  The market price per share is $22

2-4

2.2 Balance Sheet (cont'd)

• Balance Sheet Analysis

Market-to-Book Ratio

• Value Stocks Low M/B ratios

• Growth stocks High M/B ratios

Market Value of EquityMarket-to-Book Ratio

Book Value of Equity

Page 5: Chapter 2 Financial Ratio Analysis. 2-2 Example 2.1 Problem  Rylan Enterprises has 5 million shares outstanding.  The market price per share is $22

2-5

2.2 Balance Sheet (cont'd)

• Balance Sheet Analysis

Debt-Equity Ratio

• Measures a firm’s leverage

• Using Book Value versus Market Value

Total DebtDebt-Equity Ratio

Total Equity

Page 6: Chapter 2 Financial Ratio Analysis. 2-2 Example 2.1 Problem  Rylan Enterprises has 5 million shares outstanding.  The market price per share is $22

2-6

2.2 Balance Sheet (cont'd)

• Other Balance Sheet Information

Current Ratio• Current Assets / Current Liabilities

Quick Ratio• (Current Assets – Inventories) / Current Liabilities

Page 7: Chapter 2 Financial Ratio Analysis. 2-2 Example 2.1 Problem  Rylan Enterprises has 5 million shares outstanding.  The market price per share is $22

2-7

2.3 Income Statement (cont'd)

• Income Statement Analysis

• Gross Margin = Gross Profit / Total Sales

• Operating Margin

• Net Profit Margin

Operating IncomeOperating Margin

Total Sales

Net IncomeNet Profit Margin

Total Sales

Page 8: Chapter 2 Financial Ratio Analysis. 2-2 Example 2.1 Problem  Rylan Enterprises has 5 million shares outstanding.  The market price per share is $22

2-8

2.3 Income Statement (cont'd)

• Asset Turnover = Total Revenue / Total Assets

• Accounts Receivable Days

Accounts ReceivableAccounts Receivable Days

Average Daily Sales

Page 9: Chapter 2 Financial Ratio Analysis. 2-2 Example 2.1 Problem  Rylan Enterprises has 5 million shares outstanding.  The market price per share is $22

2-9

2.3 Income Statement (cont'd)

Interest Coverage Ratios

• EBIT / Interest Expense

• Operating Income / Interest Expense

• EBITDA / Interest Expense

Page 10: Chapter 2 Financial Ratio Analysis. 2-2 Example 2.1 Problem  Rylan Enterprises has 5 million shares outstanding.  The market price per share is $22

2-10

2.3 Income Statement (cont'd)

Investment Returns

• ROA Net Income / Total Assets

• ROE

Valuation Ratios

• P/E Ratio

Net IncomeReturn on Equity

Book Value of Equity

Market Capitalization Share PriceP / E Ratio

Net Income Earnings per Share