cpa bec financial ratios

8/20/2019 CPA BEC Financial Ratios

1/24

TURNOVER(TO) - (to compute average, add beg and ending balance and

A! Turnover

reducing AR "ud improve TO ratio #ompute #O$% i& not given

Net Cr Sales COGS Net Sales COGS

Ave Net Receivables Ave Inventory Ave Total Assets Ave Net A/P

AVERA$E TURNOVER 'N A% -*u+t rever+e te turnover ratio and divide

Operating #ycle

Ave Net Receivables Ave Inventory 365

Net Cr Sales/365 COGS/365 Inventory Turnover

Remember T%A - Turnover 0%ale+(numerator) divided by Ave(denominator)

indicates the recbles !uality "the success o# the co$ in

collectin% o/s recbles$ &asterturnover %ives credibility tothe current " acid test ratios

this 'easures o# ho(!uic)ly inventory is sold isan indicator o# co$

*er#or'ance$ The hi%her theturnover in %en+ the betterthe *er#or'ance

a hi%h ratio indicates e,eciveassets use to %enerate sales

Acct+ Rec1ble+Turnover

'nventoryTurnover

Total A++et+Turnover

numerator i+ +ale+ecept &or A! 3'nventory (#O$%)

denominator i+

average o& tename o& te&ormula

indicates the ave$ no$ o# daysre!uired to collect A/R- the'ore he sales are o/s$ thelon%er the recbles are o/s

indicates the avera%e no$ o#days re!uired to senn

inventory

indicates the no$ o# days bet$Ac!n o# inventory and

reali.ation o# cash #r sellin% o#inventory

'nventory#onver+ion !eriod

+ame re+ult a+ day+o& #O% in 'nventory

0 Ave 'nventoryover (#O$%./)

AR Turnover inday+ a4a ay+

%ale+ O% 5'nventory

Turnover in day+

0

numerator i+average o& tename o& te ratioenom na or o

turnover ratiodivided by ./

day+


2/24

365

5 -

RETURN - +ame &ormula a+ 6TURNOVER6 but in+tead o& +ale+ in te nume

evaluate+ pro7tability o& a 7rm

Net Inco'e NI0 Net Inco'e

Ave Total Assets Total 1!uity Ave Co''on 1!uity

OR

!ro7t 8argin Pro2t ar%in Invest'ent Turnover

easures the ti'e #ro' cash outlay to cash collection in days$ The CCC can be shortened inincreasin% inv$ turnover+ collectin% Recbles 'ore !uic)ly or de#errin% re'itances on *ayables #or alon%er *eriod o ti'e$ Can be calculated by si'*ly addin% the results o# 365/IN4 TO - 365/A/R TOand 365/ A/P TO$ se to evaluate co$ li!uidity the ability o# the co 'eet its obli%ation as theybeco'e due$

#a+ #onver+ion #ycle (###) 9

:uic4 paymt di+count9ho( lon% does it ta)e #or a co to buy inventory on credit #r a vendor+ sell that inventory on credit+ collect cash #or the saleand use the *roceeds to *ay the vendor #or the *urchase

Inventory ConversionPeriod

ReceivablesCollection Period

Payables 7e#erralPeriod

$Pay *eriod less 7iscount

Period

Remember RNA- Return 0

N'(numerator)divided byAverage(denominator)

is the *ro2tability ratio that*roduces a 8 out*ut 'a)in% iteasy to ca'*are co'*aniesthat di,er in si.es

'easures co$s 8 returnrelative to its ca*italinvest'ent ris) (ithoutre%ard to the 'ethod o#2nancin% Inco'e overInvested Ca*ital0

a critical 'easure #or deter'inin% a co$s e,ectiveness- 'easure o#the rate o# return earned by a co'*any on the e!uity co'*onent o#

its ca*ital structure$ Sho(s ho( (ell a co$ is usin% its #unds to%enerate earnin%s$

Return o& TotalA++et+ (ROA)

Return on'nve+tment

(RO')Return on E:uity

(ROE)Return on #ommon

E:uity

Numerator i+ Net'ncome NI 9 Int :Ta; Rate0 NIPre#erred 7ividendsenominator i+average o& name o&te ratio

Ave Invested Ca*ital


3/24

Net Inco'e NI0

Sales

O*eratin% levera%e

Ave Total Assets Ta; burden Interest bur

1!uity

Net Inco'e NI0 Preta; Inco

Preta; inco'e 1=IT

a

RAT'O%


4/24

#urrent ratio or loat - i+ te diBerence bet te balance o& cec4+ o+ "ic ave not cleared in te ban4 and de

- u+e o& dra&t delay+ a ca+ di+bur+ement and increa+e+ payable @oat

Overdra&t protection - O loan+ i+ activated "en an O occur+ and maybe automatically paid "it

compen+ating balance+ - are ban4 re:uirement related to a loan - ban4 re:uire+ a certain balance t

to co'*ute e,ective int rate (ith a co'*ensatin% balance Interest *aid

e; loan o# DEFF) :E8 (/ EF 8 co'*ensatin% balance Net *roceeds

'easures the no+ o# ti'es CA e;ceed C< and (ay o# 'easurin% shortter' solvency and also sho(sability o# the 2rn to %enerate cash to 'eets its shortter' obli%ations- hi%her current ratio is better-decline in o# ratio i'*lies a reduced ability to %enerate cash+ increase in shortter' debt+ dec in CA orco'bination o# both- i'*rovin% ratio an inc ability to *ay o, C


5/24

AR 8anagement

balancing credit and collection policie+ to optimiCe ave colletion period and numbre o& day+1 +ale+ i

&actor (+ell) it+ receivable+ to get more :uicly but it+ co+tly tere&ore ti+ +ld be te la+t re+ort sal

loc4bo +y+tem - i+ u+ed to accelerate te in@o" o& &und+

Trade credit i+ te primary +ource o& +ort-term credit &or +mall 7rm+

ebt-to-E:uity ratio @

the ratio indicates ho( 'uch o# the total assets are 2nanced by the creditors @

ebt-to-total-capital ratio @

Operating #a+ @o" to total debt @

Time 'ntere+t earned @

co+t o& &actoring @

#o+t o& e:uity capital @

@

A++et ba+e @

Durdle 'ncome @

Total target income @

indicates the de%ree o# *rotection to creditors in case o# solvency$ The lo(er this ration the better theco$ *osition$

ebt ratio a4a ebt-to-A++et+ratio

'easure o# 2nancial levera%e- the ratio *rovides indication related to or%s


6/24

'nventory management-

balancing te co+t o& carrying inventory again+t te co+t o& 6+toc4i

inventory turnover 3 no9 o& day+1 +ale+ in inventory u+ed to contro

Optimal level o& inventory i+ aBected by

u+age rate o& inventory per period o& time

te time re:uired to receive te inventory

te co+t per unit o& inventory, "ic "ill ave a direct impact on inventory co+t

te co+t o& placing an order impact+ order &r:uency, "ic aBect+ order +iC" and optimal invent

Tool+ or 'nventory model+ and +y+tem+ u+ed in determination o& te optimal level o& inventory or 8et'nventory turnover COGS / Ave Inventory

%a&ety +toc4

Reorder point

Economic Order =uantity (EO=)

inventory de*ends on sales #orecasts- lac) o# inventory can result in lost o# sales and e;cessive inventoinvenotry invest'ents and lost invenotry due to obsolescence or s*oila%e

co 'aintains sa#ety stoc) to ensure '#t% or custo'er su**ly re!uire'ents are 'et- i# lead ti'e beco'estoc) needed to reduce the ris) o# stoc) outs (ill increase

inventory level at (/c a co should order or 'anu#acture additional inventory to 'eet de'and and toavert incurrin% stoc)out costs

it antici*ates orders at the *oint (here carryin% costs are nearest to restoc)in% costs in order to 'ini'i.

ANAGING IN41NToRM+ T1R1 IS TRA71O&& =T CARRMING COSTS T1 COSTS O& O


7/24

material+ re:1t planning (8R

*u+t-in-time (F'T) model

Ganban 'nventory #ontrol %ives visual si%nals that a co'*onent re!uired in *roduction 'ust be re*lenished$ It *revents over

OTDER >OR8U?A

#apital Hudgeting proce++

%tep+ in #alculating a #apital Hudgeting pro*ect1+ annual ca+ >lo"+

:0 1sti'ate net cash ino(s

E0 Subtract non cash ta; deductible e;*enses to arrive at *reta; inco'e e; de*reciation and

30 Co'*ute inco'e ta; e;*ense based on the ta; rate

K0 Subtract ta; e;*ense #ro' net cash ino(s to derive a#terta; cash o(s

e;tends the idea o# co'*utrei.ed inventory control to 'anu#acturin% o*erations$ RP syste's aredeter'ines the inventory re!t (hen a %iven no$ o# units is needed$ The 'ethod is used to create

(as develo*ed to reduce the la% ti'e bet inventory arrival and inventory use$ IT ties delivery o# cre!uires a considerable de%ree o# coordination bet 'anu#acturer and su**lier$ It 'aintains a s'al

a&ter-ta ca+ @o"+ over li&e o& te rpro*ect, bot 'RE#T the e,ect (hen co$ *ays out casindirect cash o( e,ects included transactions that are indirectly asso$ (ith a ca*ital *roQect or re

%tage+ o& ca+ @o"+ ina capitalinve+tment pro*ect

include inception o& te pro*ect (at time period Cero), te on-going periodic ca+ @o"+pro*ect


8/24

Preta; Inco'e Net Ino(0 :FFFFF

:ta; rate0 KF8 ta; rate 6F8

A#terta; Cash &lo( 6FFFF

Add> de*reciation ta; shield E:FFF ; KF80 KFF

A#terta; cash o( 6KFF

; depreciation o& I2J,KKK not deducted +ince tere i+ no ca+ involved in depreciation but

epreciation ta +ield @

#> valuation metod deter'ine the *resent value o# all e;*ected #uture cash o(s usin% a *redete

A&ter-ta ca+ @o"+ @

A&ter-ta co+t o& debt (4d) @

#o+t o& pre&erred +toc4 @

#o+t o& pre&erred +toc4 (4p+) @

?here> 7*s @ Pre#erred stoc) cash dividiends

!re+ent value o& J or a lump +um n @ nu'ber o# years @

!re+ent value o& an annuity @

Net !re+ent Value (N!V) Positive NP4 invest'ent should be 'ade IRR H NP4 re!uired rate o# return0 @

Ne%ative NP4 invest'ent should not be 'ade IRR H NP4 re!uired rate o# return0 or

@>actor o& 'nternal Rate o& Return('RR)

re!uire 'ulti*le trial " error co'*utations- *roduces+ rate o# return that *roducesan NP4 o# F- it isevaluated in relation to '%ts re!d hurdle rate a#ter the co'*utation- the hi%her the P4 #actor+ thelo(er the co'*uted rate IRR0+ a)a Ti'eadQusted Rate o# Return


9/24

!aybac4 !eriod-even ca+ @o"+(#>)

i+counted !aybac4 !eriod sa'e #or'ula (ith *aybac) *eriod+ Qust 'ulti*ly the 2%ures by the P4 #actor

!re+ent Value >actor

!ro7tability 'nde

Re+idual 'ncome

Re:uired return &or Re+idual 'ncome hurdle rate @ tar%et rate or discount rate in co'*utin% NP4

Economic Value added (EVA)

9 14A @ *er#ora'ce 'eetin% stds Stoc) u* > 14A @ not 'eetin% stoc) do(n

Re:uired Return &or EVA Pro2t be#ore interest but a#ter ta;

Increase stoc) value/2r' value

ti'e re!uired to recover cost o# an invest'ent+ o#en used in ris)y invest'ent' #ocuses on li!uand ris)s- ne%lects total *roQect *ro2tability+

The hi%her the P4 #actor+ the lo(er the co'*uted rate IRR0$ Increases to the invet'ent or deto the cash o(s serve to increase the P4 #actor

IRR @ discount rate at (hich NP4 o# the invest'ent is e!ual to .ero F0 IRR @ discount rate aNP4 o# the invest'ent @ .ero F0 IRR H urdle rate acce*t - IRR hurdle rate @ reQect

is also re#erred to as the e;cess *resent value inde; or si'*ly P4 inde;$ Co'*any ho*e that thi(ill be over :$F (hich 'eans that the P4 o# the ino(s is H P4 o# the outo(s

inco'e in e;cess o# desired 'ini'u' return historical (ei%hted ave$ cost o# ca*ital is usually usetar%et or hurdle rate$ i# the anount o# the inco'e #r invest'ent e;ceeds the co'*uted re!uired ret*er#or'ance obQectives have been 'et

is a residual inco'e techni!ue used #or ca*ital bud%etin% " *ero#r'ance evaluation$ It re*resentsresidual e;cess0 inco'e o# *roQect earnin%s in e;cess o# cost o# ca*ital incld$ Cost o# e!uity asso(ith invested ca*ital$ It 'easures actual dolars that an invet'ent earns hence hi%h return invet'not be reQected by hi%return divisions$


10/24

@ Ris)#ree rate 9

@ Ris)#ree rate 9

@ Ris)#ree rate 9

?here>

@ the dividend *e share e;

g @ the constant rate o# %ro(

@ Preta; cost o# lon%ter' de

8ar4et rate o& intere+t @ ris)#ree rate o# interet 9 in

?oc4bo +y+tem+ e;*edites cash ino(s 'ini'i.e collection oat0

#oncentration ban4ing is the 'ethod by (/c a sin%le ban) is desi%nated as a central ban) as a 'ean

Cero balance account ban4ing

Opportunity co+t is the *otential bene2t lost by selectin% a *articular course o# action e; reven

Relevant co+t those costs that (ill chan%e in re*onse to the selection o# di,erent courses o#

'ncremental #o+t re*resent the chan%e on cost associated (ith di,erent alternatives

iBerential #o+t re*resent the chan%e in costs associated (ith E se*arate courses o# action

Avoidable co+t+ re*resents the costs that can be averted by selectin% di,erent courses o# acti

operating leverage the de%ree to (hich a 2r' used 2;ed o*eratin% costs as o**osed to variable

hi%h o*eratin% levera%e @ hi%h 2;ed o*eratin% costs " lo( variable o*eratin%

#o+t o& Retained Earning+ (4re) -8etod J #apital A++et+ !ricing

8odel (#A!8)

#o+t o& Retained Earning+ (Gre)-8etod 2 i+counted #a+ >lo"(#>)

7:

9 %

PF

!K

stoc)

J

8etod Hond ield !lu+ ri+4premium (HR!)

re*resents an account that 'aintains a .ero bal and acco'*anied by a 'aster or *athe availability o# o# idle cash


11/24

7nancial leverage as the de%ree to (hich a 2r' uses debt to to 2nance the co'*any

combined (total) leverage results #ro' use o# both 2;ed o*eratin% costs and 2;ed 2nancin% costs to'a%

#apital Hudgeting tecni:ue+ (u+e


12/24

?e++ Non-ca+ ta deductibe

epreciation 5+FFF$FF

AmortiCatiomn 5+FFF$FF :F+FFF ; KF80 9

!re-ta income Taable 'ncome F+FFF$FF

Ta rate KF8 36+FFF$FF

Net 'ncome 5K+FFF$FF

;

Durdle rate - i+ te di+count L u+ed in N!V calculation

Rate o& return o& te pro*ect P urdle rate @ Positive NP4 H F 0 @ 'a)e invest'ent

Rate o& return o& te pro*ect , urdle rate @ Ne%ative NP4 + F 0 @ do not 'a)e invest'ent

'nternal Rate o& Return @ NP4 @ F

i+counted #a+ >lo" model+

N!V u+e time value concept+

'RR u+e time value concept+

!' re:uired detailed ?T &oreca+t+ o& pro*ect+ ca+ @o"+ &or longer term pro*ect+ ca+ @o" pro


13/24

divided by 2)

Net Sales Net Sales

te denominator by ./

365 365

A/R Turnover A/P Turnover

indicates ho( e,ectively (or)in%ca*ital is used

'nve+tmentTurnover


14/24

7iscount

rator, u+e net income

upont Return on A++et+

Pro2t ar%in Total Assets Turnover

upont Return on E:uity

ratio indicates ho( e,ectively(or)in% ca*ital is used


15/24

Pro2t ar%in Asset Turnover &inancial


16/24

Current Assets / Current


17/24

receivable+

o# A/R to a #actor usuallt a ban)

Total


18/24

ut6

ntory :uantitie+

level+

o& invnetory control

sa#ety stoc) 9


19/24

erru*tion o# the entire 'anu#acturin% *rocess as the result o# lac)in% a co'*one't

ion

o'*uterbased and are desi%ned to control the use o# ra( 'aterials in the *roduction *rocess$ Itedules o# (hich ite's (ill be needed and (hat ti'es they (ill be needed$

o the s*eed o# asse'bly line$ It reduces the need o# 'anu#acutrers to carry lar%e inventories+ butventory' hence it increases Inventory turnover and decreases invenotry as a 8 o# total assets$

ash+ or 'a)es a cash co''nit'ent that is directly related to ca*ital invest'ent0 and 'N'RE#T ncash activity that *roduces cash bene2ts or obli%ations e;$ de*reciation ta; shield0 are analyCed

by te pro*ect and te terminal value a++ociated "it te di+po+al or "inding do"n o& a


20/24

depreciation ta +ield "a+ added +ince it i+ a ta +aving+99

de*reciation ; ta; rate

r'ine discount rate e;$ ?ACC+ re!uired rate o# return0

Preta; cash o( ; :ta; rate0

*reta; cost o# debt ; :ta; rate0

Pre#erred stoc) dividends / net *roceeds o# Pre#erred stoc)

7*s / N*s

N*s @ Net *roceeds o# *re#erred stoc)

Pay'ent ; :

Interest Rate

P4 o# #uture o(s cash ino(s P4 cash outo(s @ F

P4 o# cash ino(s ori%inal cost o# the asset or invest'ent

Net Incre'e'tal invest'ent invest'ent re!uired

Net Annual Cash &lo(

&uture value / : 9 interest rate0n

: 9 interest rate0n V


21/24

Net Initial Invest'ent / Increase in annual net a#terta; cash o(

P4 Initial Invest'ent / P4 o# Increase in annual net a#terta; C&

Invest'ent / Cash &lo(s

Net incre'ental invest'ent invest'ent re!uired0 / Annual C&

P4 o# net #uture cash ino( / P4 o# net initial invest'ent

Annual a#terta; cash o(s / P4 o# net initial invest'ent

Net Inco'e Re!uired return or

Actual inco'e earned by an invest'ent re!uired return

Net =oo) 4alue ; urdle Rate

Net o*eratin% *ro2t a#ter ta;es NOPAT0 Re!uired Return

Invest'ent 7ebt and 1!uity0 ; D?ACC

debt / debt 9 e!uity Pre#erred stoc) and Co''on Stoc)0

e!uity / debt 9 e!uity Pre#erred stoc) and Co''on Stoc)0

, L in capital +tructure &or EHT, !% 3 #% "ould be computed

Cost o# e!uity ; 8e!uity in ca*italstructure

?ei%hted ave a#terta;cost o# debt ; 8 debt inca*ital structure

ebt a+ ta +aving+"en debt i+ u+ed in7nancing a pro*ect


22/24

Ris) *re'iu'

=eta ; ar)et Ris) *re'iu'0

=eta ar)et return Ris)#ree rate0

*ected at the end o# one year

th in dividends

t 9 'ar)et ris) *re'iu'

ation *re'iu'

s o# controlln% recei*ts

ue that (ill not occur

action

on

*eratin% costs

costs

ent account the serves to #und any ne%ative bal and is desi%ned to 'a;i'i.e


23/24

ni#y retuns to the 2r' o(ners

ad*u+ted rate o& return (!V o& #a+ 'n@o" 0 !V o& #a+ Out@o"

e+tment on te pro*ect to arrive at 5 or - N!V

& e net ca+ out@o"+

A&ter-ta #a+ >lo"+

6F+FFF$FF Net Cash Ino( a#ter ta; o# KF8


24/24

K+FFF$FF Ta; shield de* or a'ort ; ta; rate0

6K+FFF$FF A#terta; cash o(

3$L P4 value o# an annuity series o# ino( a't

EKE+56F$FF *v O& &uture cash o(

EKF+FFF$FF Initial Cash outo( or Invest'ent

E+56F$FF N1T PR1S1NT 4A

cpa bec financial ratios

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