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Table of Contents
What does a creditor need from the financial ratio of a company? ..................................................................... 3
What does an investor need from the financial ratio of a company?................................................................... 4
The managers and employees uses ..................................................................................................................... 5
References ............................................................................................................................................................ 22





Financial ratios are the meaningful relationship between two financial numbers in any of the
financial statements that the organization provides, or an outsider agency or financial
institution who do a study for the organization and creates their financial statements. (wiki,
2011)
These relations between these numbers gives a lot of abilities to measure the liquidity,
profitability, Dept, activity, and Market ratios any decision maker should know to support the
decision making process. (wiki, 2011)
There are a lot of financial ratios terminologies and benefits, many uses and many users also.
Each user can use such a financial ratio for his/her sake also, from the CEO, Employees,
Managers, investors, creditors, stockholders, to even banks, government and foreign
organizations and international ones.
Some purposes of these ratios are to compare between companies according to many
factors. In addition, it can be get bigger into comparing between two industries to know which
is better and which is not. And sometimes it can be for a one company, that to compare
between two different period of time, to see if it is doing better or not. Or even can compare
between a single company and its industry average (wiki, 2011).
Each user each user asks for some financial ratios for their needs, and that what the following
going to talk about is.

What does a creditor need from the financial ratio of a company?

First of all, the definition of a creditor is a person or a business firm that supply other
businesses with any kind of supply that business needs, as money, products or services in
credit, with a certain time of a delayed contract to pay after a period of time in spite of paying
it at the moment as cash. And why would they do this? Because that will motivate other
business to buy from them, then to do their businesses then get the revenues from their
businesses and then that will make them able to pay for the creditor. That will make other
businesses feel that they are not loosing liquidity from their hands. THE creditor that gives
longer period is the creditor who will get more customers. (bized, 2003)


But what would happen if the other company couldnt pay for the creditor on time? The
creditor have signed a contract with that company, and that contract should have a closer that
if the payment exceeded this certain time of days, an interest would be added for each extra
day the company delays the payment. It would be something as 60n/2, as after 60 days, a 2
percent will be added on the total amount for each extra day.
So what would the creditor need from the financial ratios? Logically, the creditor would ask for
a dept ratio, turnover ratio and liquidity ratio, that will make the creditor able to get clear
information about the cash position statues of the company, to protect his right of getting his
money back at time. Also the creditor will need to know how the company is operating to
know if the company will be able to sell the products it bought from the creditor or not, also to
know how much dept the company has, to know if the dept ratio is increasing or decreasing,
because that will prove of the company is able to pay its payments for other creditors and
banks, or not!
More uses the creditor can have from the financial ratios of the financial statements that the
company provides, is to know what are the real problems may be the business horizon is
relation to its cash position, receivables, inventories or dept levels (Johnson, 2010)
Some banks (money creditors) asks for the quick ratio of the company, because they want to
know what is the ratio of the fast solders to the current assets with the inventory, because the
inventory are slow solders, and the bank might not accept giving a note payable if the quick
ratio is small.
What does an investor need from the financial ratio of a company?

The investors use the financial ratios to analyze the company, and to know if they are going to
benefit from investing in it or not. In addition, they study the financial ratios for forecasting and
estimating what would they profit or loose in the future, to be able to be prepared for the
future, or to take faster actions for investing more or dropping their investment from that
company. This is the general uses of the investors.


The financial ratios can show the investor how the company is getting financed, and if these
financial recourses are still available, and how long they are going to stay, all of these
questions can be answered by the financial ratios.
Another thing is that the bonds holders can know if they are able to get their money back with
the extra interests (bond yields) through the liquidity and dept rations, they can estimate the
time that the company would be able to pay the principle amount of the bond, and when they
are going to be able to pay the extras for the bond holders and the stock holders also.
The investors can know the stock prices and the stock profit from the profitability rations, and
they can estimate close numbers to the one that the company would pronounce about the
stock prices and the dividends that it will pay for the holders.

The managers and employees uses

The managers should have executive reports about the company performance in all divisions,
such as the HR, marketing and Finance division. And in the finance department, the reports
that they provide are mainly financial statements and financial ratios results. That will be the
very right summary for the manager to help the process of the decision making.
The manager would be able to know what is the liability that the company has, and its ratio to
the cash, inventory and assets that the company has. Also will know the inventory ratio to the
other assets that the company has to know if the company should sell some of the other
assets, or wait for the inventory to be sold.
These ratios can help the manager to take the decision of (manufacture or purchase) and
many other decisions as (take a loan or sell) or (take a loan from the bank or sell bonds or
issue new stokes).
These primary decisions can be different from manager to manager, but every manager will
depend on the financial ratio because that is its job, to give the right information to the
manager, and to be a primary part of the decision making.


But the employees are not decision makers, they are just followers to the manager, and if the
manager told them that I want the dept ratio to be only 35% and it was 39%, the employees
should study some other dept ratios and liquidity ratios to know if they are able to cover the
4% through paying it cash or that would effect the liquidity and put the organization in a risk
place or not. The employees would depend on the ratios for other tasks and not for changing.
For example, if the manager asked for more assets, the employees would use the financial
ratios to give the manager a choice of buying it with a loan, or with issuing new stocks. And
then the manager would take the decision.



Management analysis
Inventory ratio:

It commonly measures the activity, or liquidity, of a firms inventory. Inventory
ratio measures the activity, or liquidity, of a firms inventory. A ratio showing how
many times a companys inventory is sold and replaced over a period. (author, 2011)

Inventory ratio = cost of goods sold / Inventory

Year 2011 = 64431000/776000 = 83

Year 2010 = 39541000/1051000 = 37.6

Year 2009 = 25683000/455000 = 56.4



Awe can see here, that the inventory ratio which measure the activity and liquidity of a firms
inventory was law at first year then it decreased in the second year to go and increase again in
2011. In 2009 the inventory ratio was 56.4, while it decreased in 2010 to become 37.6, but it
went and increased up to 83 which is high in the year 2011.
Asset turnover:

It is the financial ratio which measures the efficiency of a company's use of the assets it owns in
generating sales revenue or sales income for the company.
years 2009 2010 2011
IR 56.4 37.6 83


It is the amount of sales generated for each and every dollars worth of assets. It is
calculated by dividing sales in dollars by assets in dollars. It is also known as the asset turnover
ratio. (anonymous, 2011)

Asset turnover = Net sales Revenue / Average total assets

AT Year 2011 = 108249000/116371000 = 0.93

AT Year 2010 = 65225000/75183000 = 0.867

AT Year 2009 = 42905000/47501000 = 0.9

year 2009 2010 2011
AT 0.9 0.867 0.93

Generally, asset turnover is what the company gain from its sales, as we can see here in the year 2009
the turnover was 0.9, but it fall in 2010 to give asset turnover of 0.867, while in the year 2011, it raised
again to 0.93.

Gross profit:
is the difference between revenue and the cost of making a product or to provide a service,
before deducting overhead, payroll, taxation, and interest payments. (gross profit, 2011)
Gross profit measures the percentage of each sales dollar remaining after the firm has paid for its goods.
Furthermore, the more the gross profit margin, the better it is, the lower the relative cost of merchandise
sold. Pg.67



Gross profit = revenue cost of goods sold
In the year 2011 = 108249000-64431000 = 43818000
In the year 2010 = 65225000-39541000 = 25684000
In the year 2009 = 42905000-25683000 = 17222000
Year 2009 2010 2011
GP 17222000 25684000 43818000


As we calculated the gross profit for the years 2011, 2010, and 2009, we found out that the gross profit
which measures the percentage of each sales dollar was 1.67 in the year 2009, while it decreased to 1.65
in the year 2010, and in the year of 2011 it increased to 1.68.
Operating profit:
The profit earned from a firms normal core business operations. This value does not include any profit
earned from the firms investments (such as earning from firms in which the company has partial interest)
and the effects of interest and taxes. (author, operating profit, 2011)
Operating Profit margin = operating income / total revenue

In the year 2011 = 33790000/108249000 = 0.31
In the year 2010 = 18385000/65225000 = 0.28
In the year 2009 = 11740000/42905000 = 0.27
Year 2009 2010 2011
OP 0.27 0.28 0.31



As we can see that operating profit margin kept on increasing through out the three years,
as it was 0.27 in the year 2009, it increased to 0.28 in the year 2010, and kept on increasing to
get 0.31 in the year 2011.



Net Profit:
Net profit is a measure of the profitability of a venture after accounting for all costs. Measure the
percentage of the dollars remaining. (author, net profit, 2011)

Net profit = total return expenses after taxes and entrance

















ROA:
An indicator of how profitable a company is relative to its total assets. ROA gives an
idea as to how efficient management is at using its assets to generate
earnings. Calculated by dividing a company's annual earnings by its total assets, ROA
is displayed as a percentage. Sometimes this is referred to as "return on investment".
(anonymous, return on assets, 2011)



The formula used for ROA is: ROA = Net Income / Total Assets
ROA for the year 2011: 25922000/116371000 = 0.22
ROA for the year 2010: 14013000/75183000 = 0.186
ROA for the year 2009: 8235000/47501000 = 0.173
Year 2009 2010 2011
ROA 0.173 0.186 0.22

ROA is how efficient is the management in using its assets to generate earnings. As we can see here it is
increasing among the three last years for this organization where it had a 0.173 for the year 2009, and it
increased to 0.186 in the year 2010, while as for the year 2011, we can see a big increase which reached
0.22.








Creditor Analysis

y Current Ratio:
It is one of the most usually cited financial ratios to measure the company's ability to
meet its short term requirements.
y Current Ratio Formula:
Current Assets
Current Liabilities
Year#1 CR= 47,501,000/11,506,000 = 4.13
Year#2 CR= 41,678,000/20,722,000 = 2.01
Year#3 CR= 44,988,000/27,970,000 = 1.61
Years 2009 2010 2011
CR 4.13 2.01 1.61



The CR isn't acceptable for the last year because it is less than 2.0 and it is less
liquid. Usually, the higher the CR, the more liquid the company is considered to be.
Moreover, a CR of 2.0 is acceptable, but the values depend on the industry and how
the company operates. The more predictable a companies cash flows, the lower the
acceptable CR.









0
1
2
3
4
5
2009 2010 2011
CR
CR


Quick Ratio:
It is similar to the current ratio but it leaves out inventory, which is usually the least
liquid current asset.
y Quick Ratio Formula:
(Current Assets Inventory)
Current Liabilities
Year#1 QR=(47,501,000-455,000)/11,506,000 = 4.09
Year#2 QR=(41,678,000-1,051,000)/20,722,000=1.96
Year#3 QR=(44,988,000-776,000)/27,970,000 = 1.58
Years 2009 2010 2011
QR 4.09 1.96 1.58

A QR of 1.0 or more is usually acceptable. Moreover, the QR provides a better
measure of overall liquidity only when a company inventory can't be easily converted
into cash.














0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
2009 2010 2011
QR
QR


Debt Ratio:
It measures the proportion of total assets financed by the company's creditors.
y Debt Ratio Formula:
Total Liabilities
Total Assets
Year#1 DR= 15,861,000/47,501,000 = 0.334 = 33.4%
Year#2 DR= 27,392,000/75,183,000 = 0.364 = 36.4%
Year#3 DR= 39,756,000/116,371,000 = 0.342= 34.2%
Years 2009 2010 2011
DR 33.4 36.4 34.2

The higher this ratio, the greater the company's degree of indebtedness and the
more financial leverage it has.















31.5
32
32.5
33
33.5
34
34.5
35
35.5
36
36.5
37
2009 2010 2011
DR
DR



Average Collection Period:
It is helpful in evaluating credit and collection policies. It is dividing the average daily
sales into the accounts receivable balance.
Average Collection Period Formula:

Accounts Receivable
Average Sales per day= (Annual Sales/365)

Year#1 ACP= 6,192,000/(42,905,000/365)=52.7 days
Year#2 ACP= 11,560,000/(65,225,000/365)=64.7days
Year#3 ACP=13,731,000/(108,249,000/365)=46.3days
Years 2009 2010 2011
ACP 52.7 64.7 46.3

The ACP is important only in relation to the company's credit terms. If Apple
Company extends 30-day credit terms to customers, an ACP of 46.3 days may indicate
a poorly managed credit or collection department or both. If the company had extended
47-day credit terms, the 46.3-day ACP would be acceptable.








0
10
20
30
40
50
60
70
2009 2010 2011
ACP
ACP









Investor decision analysis

As investment manager I care more about the profit and revenue in the two terms the long term and short term however, I could
indicate that by applying some analysis formula shows the periodic financial performance due to retain on investment like gross profit
margen
1 - operating profit margen
2 - net profit margen
3 - EPS
4 - ROA
5 - Price / earning ratio
6 - Maket / book ratio
Operating profit margin
The operating profit margin m /easure the percentage of each sales dollar remaining after all cost and expenses other than interest ,
tax and preferred stock dividends are deducted. It represents the pure profit earning on each sales dollar. operating profit are pure
because the measure only the profit earned on operation and ignore interest taxes and preferred stock dividend (high operating profit
margin are preferred )
Operating profit margin formula

opeiating pioit
sales


Year 2011 : 33,790,000.00 / 108,249,000 = 0.212
Year 2010 : 18,385,000 / 65,225,000 = 0.2818
Year 2009: 11,740,000 / 42,905,000 =0.274
Years 2009 2010 2011
OPM 0.274 0.2818 0.212

As it shown upstart that the profit margin fluctuated between the year 2009 and 2011
However due to that producer never release the iphone 5 but only upgraded it to 4gs, many clients refuse to sell there old iphone 4 and
buy the new iphone 4s however that lead to many stoke in the store and lead to decrease in operating profit because the decreasing
level in sales.






Net profit margin
The net profit margin measure the percentage of each sales dollar ramming after all cost and expenses including interest taxes and
preferred stock dividend have been deducted .(the higher profit margin the better )
Net profit margin formula

eaining available foi common stockholuei
sales


Year 2009 : 13,331,000/108,249,000 = 0.123
Year 2010 : 10,668,000 /65,225,000 = 0.164
Year 2011 : 8,210,000 / 42,905,000 = 0.19
years 2009 2010 2011
Net profit margin 0.123 0.164 0.19

From above we saw that Apple corporation has Avery good net profit margin percentage increase in continually between the year
2009 and 2011 that change conceder favorable to investor and that indicate a good financial performance that stock holder like it


Earning per share
0
0.05
0.1
0.15
0.2
0.25
0.3
2009 2010 2011
OPM
OPM
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011
Line
NPM


The firm earning per share is generally of interest to present or prospective stock holder and management , it represent s the number
of dollar earned during the period on behalf of each outstanding shares of common stock .
EPS formula

eaining available foi common stock
numbei of shaie of common stock out staning

Year
2009 = 2.7
2010 = 4.3
2011= 7
Years 2009 2010 2011
EPS 2.7 4.3 7

As we saw that firm almost provide the highest value for the costumer if we compare that if we invest 100000 chare the EPS for the
year 2009 is 270000 and if we keep the share owner we well increase the value of stock about to 7000000 dollar that men the stock
price will rise to 260% witch I believe it is an extraordinary profit to stock holder













Return on asset
The ret
Return on total asset or return in investment measure the overall effectiveness of management in generating profit with its available
assets.( The higher the firm s return on total assets , better)


ROA formula

eaining available foi common stockholueis
tatall assets

Year 2009: 13,331,000 / 116,371,000 = 0.115
Year 2010 : 37,169,000 / 75,183,000 = 0.493
Year 2011 : 23,353,000 / 47,501,000 = 0.492
Years 2009 2010 2011
ROA 0.115 0.493 0.492

From above that the return from asset effected from financial crises so in 2009 the ROA was 0.115 but when apple introduce the first
multi touch tablet in the market on 2010 many people start to switch off there laptop and start to use the ipad suddenly that lead to
unusual sales record which it officially inter Genes record as most popular device in the world



Price / earning ratio
The price / earnings ratio is commonly used to assess the owner appraisal of chare value ( estimate the value of firm ) the P/E ratio
measure the amount that investors are willing to pay for each dollar of a firm earning . the level of this ratio indicate the degree of
confidence that investors have in the firm future performance
P/E Formula


maikit piice pei shaie of common stock



Year 2009 : 211.61/2.7 = 78.4
Year 2010 : 325.6 / 4.3 = 75.72
Year 2011: 380 / 7 = 54.29

Years 2009 2010 2011
P/E 78.4 75.72 54.29

The result is extraordinary to mention that investor willing to pay a range from 54.29 to 78.4 for each 1 dollar earning for investment
that indicate that apple company has long history with success to increase the stock holder wealth
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011
Line
ROA



Market / book ratio
The market / book ratio provide an assessment of how investors view the firms performance . it releas the market
Value of the firms shares to their book value
Tract accounting - value .

M / B ratio formula


common stock equity
numbei of shaies

Year 2009 : 8,210,000 / 707,000 =
Year 2010 : 10,668,000 /1800,000 =
Year 2011 : 13,331,000 /1600,000=
















0
10
20
30
40
50
60
70
80
90
2009 2010 2011
P/E ratio
Series 1





References
bized. (2003, 01 30). Financial Ratio Analysis - Creditors' Turnover Ratio. Retrieved 11 22, 2011, from biz/ed:
http://www.bized.co.uk/compfact/ratios/sdc8.htm
Johnson, J. (2010, Dec 06). Uses of Financial Statements to Creditors. Retrieved 11 22, 2011, from eHOW:
http://www.ehow.com/list_7453791_uses-financial-statements-creditors.html
wiki. (2011, Oct 14). Financial ratio. Retrieved Nov 22, 2011, from wikipedia: http://en.wikipedia.org/wiki/Financial_ratio
gross profit. (2011, 10 19). Retrieved 12 11, 2011, from wikipedia.com: http://en.wikipedia.org/wiki/Gross_profit

anonymous. (2011). asset turnover. Retrieved 12 11, 2011, from investopedia.com:
http://www.investopedia.com/terms/a/assetturnover.asp#axzz1gDduqXQb

anonymous. (2011). return on assets. Retrieved 12 11, 2011, from investopedia.com:
http://www.investopedia.com/terms/r/returnonassets.asp#axzz1gDduqXQb

author, a. (2011). inventory turnover. Retrieved 12 11, 2011, from investopedia.com:
http://www.investopedia.com/terms/i/inventoryturnover.asp#axzz1gDduqXQb

author, a. (2011, 12 1). net profit. Retrieved 12 11, 2011, from wikipedia.com: http://en.wikipedia.org/wiki/Net_profit

author, a. (2011). operating profit. Retrieved 12 11, 2011, from investopedia.com:
http://www.investopedia.com/terms/o/operating_profit.asp#axzz1gECIPcUi

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