er 13 ~Tianeset ocatements Analysis 697 7 cpa liquidity, use of leverage, asset manage; : prota ility, growth, and rina nagement, cost control, a, LIQUIDITY RATIOS ~ provide i Ir informati irm’s abili to pay its current obligations ‘ation about the firm’s ability and continue operations. uae Formuta SIGNIFICANCE _| 1. Current Ratio or Ranegg G2eital | | __Current assets | Test of short-term io or Bankers’ Current Liabilities debt paying ability. Ratio a | Measures the firms = ability to pay its a, 2. Acid Test or uct Assets _ short term debs from . Quick Ratio rent Liabilities its most liquid assets 1 without having to rely ‘on inventory. e * Quick Assets = Cash + e Cash Equivalents + Net Receivables + Marketable Securities A more conservative Cash + Cash Variation in Quick Equivalents + QA Ratio. It tests short- Marketable Jo ied term liquidity without - Securities having to rely on > Cash Ratio. Current Liabilities receivables and inventory. Cash + Cash Equivalents + . > Cash to Nketotle iy Measures the liquidity Current Securities CEC) of current assets, Assets Ratio | —Cirrent Assets Operating Cash Shows the laren significance of cash > Cash Flow —Gament Labilties flow for settling Ratio avant Latah current obligations as _. they become due. + Cash Equivalents + Reflects the Net Receivables + percentage of near- Marketable cash items to the 3. Defensive _Securities ___ | gaily operating cash 4 Interval Daily Operating flow, 5 Cash Flow698" PART 3 ~ FINANCIq) Mat Retained Earnings + Depreciation Current Investment 4. Investment Financing he Increase Ii "| Stone pese~ the arr, CUTTENE inecpy 2% that wag ptt bY depreciate ne increase inretaree earnings, * Weighted Non-Cash Current Assets* 5. Uuicty Index Current Assets *Non-Cash Current Assets are weighted by multiplying their balances by the average days they are removed from conversion to cash. A measure oftig—~ liquidity oF cure Assets stated in da It shows the to-period changes n an entity iquidy b. LeveRace Ratios — measure the com assets and operations, * Financial Leverage (trading finance assets and operat pany’s use of debt to fiane on the equity) - the use of det® tions; It is advisable to trade * a 7 d ty equity when €arnings from borrowed funds exceed cost of borrowing. > . gs . As leverage Increases, the risk borne by credit’ well as the risk that the its maturing obligatio; ~ Since intere: increases the Solvency ~ th obligations and survive KEY INGREDIENTS OF Solvency 1. Caprray STRUCTURE e firm may not be able NS, increases. st expense is tax deductible ‘tis pro company’s return when it is Pt tom jew? to ¢ firms financial ability to pay in the long-term. ~ the sources of financi"§13-Financial Statements Analysis ad “b. Debt ~ the 699 a. Equity (the yj Ownershi: ca SK Capital of the firm) - the SMP interest in the firm : Interest of creditors in the firm EARNING POWER — the capaci capacity of the firze’ rat produce cash inflows a ace Rar ——— }—~ g FORMULA SIGNIFICANCE 1. Financial ‘Amount of total Leverage Average assets financed by Ratio or Equity Te equity. The higher Multipier sr > the ratio, the greater teveraga eamnca is the leverage ee Equity (assets financed by debt) and the greater the risk. Return on If the index exceeds 2. Financial Common 1.0, it is favorable Leverage ——Eaquity____— and the use of Index Return on financial leverage is Assets successful. Measures the extent Interest y to which the assets 3. Interest bearing Debt_—_| having explicit cost bearing Dent Equity + (total capital) are Ratio Interest: financed by interest bearing Debt bearing debt. Total Measures the 4, Total Debt __Liabilities___| percentage of funds Ratio Total Assets provided by (Capital) creditors. ‘Compares resources Total provided by creditors 5. Debt to Equity | ___Liabilitles___| with resources * Ratio quity provided by shareholders —— Total A more conservative Liabilities | measure of tong- 6 Debt to Equity - term debt-payment Tangible Net Intangible ability than the debt Worth Ratio Assets ratio or debt to equity ratio,700 PART 3 ~FINANCIay Maing 8 Mey [Zo tm Earnings . before Interest- Indicates Eamed Ratio. ‘Tae (EB) Fae oe or iorerest Interest interes covera Expense SS chars EBIT + oo Interest | 8 Fixed Charge Pocconoe + Coverage Operating Indicates the Ratio or | ot sate tr Eamings to Tinterest + Payee Fixed Charges Interest charges, Ratio Portion of Operating Leases ; Measures the 9. Operating Operating of total fi abilities ta Cash Flow to —LashFlow | can be paid out Total Debt Total Debt the cash flows fom ato operations. C. ASSET MANAGEMENT RATIOS ~ measure how the firm uses its assets to generate revenue and income Rario ForMuLa SIGNIFICANCE Indicates if a firm holds 1. Finished Goods or Cost of Sates excessive stocks of imertors Merchandise Average Inventory | that are unproductive and Inventory Turnover lessen the company’s profitability. Number of Days in a Year , Inventory Turnover 2 fverage Age of Ratio Measures the erase fories. or t inventory 5 Number of Days of or of days tha Inventory | before sale. | _Average Inventory _ | Average Daily Cost 7 | Of Sales — ~~ ey nui 3, Receivables __.Net Credit Sates Measures the aveor ae Turnover Ratio Average Accounts | of days to colet ai" nn Recetvafrom 5 assets me pat ___gs3~ Financial Statements Analysis 701 . ‘Number of Days 3," Average Age of in ud Receivables or Receivables ~ abl Number of Turnover Ratio Days of Measures the average Receivable or Of, number of days to collect Average Average Accounts a receivable. an —__Receivable_ tke ‘Average Daily Sales 5. Operating . 1 Cycle or Average Age cf Measures the average Conversion Inventories + Average | number of days to convert Period ‘Age of Receivables | inventories to cash. 6. Average Age of Average e. oes “accounts Payable _ | Determines whether the ps ‘Average panied firm is paying its invoices. Purchases ona timely basis. 7. Fixed Assets Net Sales Measures the level of use Turnover Ratio ‘Average Net of property, plant, and Fixed Assets _| equipment. 8. Total Assets ___Net Sales __| Measures the level of Turnover Ratio ‘Average Total capital investment relative Assets to sales volume. Measures the level of 9. Total Capital Net Sales____| total assets having Turnover ratio Total Capital explicit costs relative to sales volume. * Total Capital = total assets having explicit costs (equity + | _interest-bearing debt) | Total Capital, - \ 10, Investment cal ee Measures the percentage __Capttal I Rate eral Capital, change in total capital _ 200A _ “Amount Measures the percentage Available for of net income availadie for 11. Plowback Ratio Reinvestment __ | investment * Ahigh rate means less al finanPART 3 ~ FINANCIAL Mate tt thy 702 ire how well a fj gement RATIOS ~ i a firm Cont, d. Cost MANAG! oy i ee Semi vcane ~ | Measures how mary — y 3 Dow tay —— - Tihs Profit Net Sales ~ Cost be spent for maria 1, Gross Prof | ___of Sales] R&D, and acre see oe Net Sales costs whe sun percentage targeted income, "4 i | Labor Cost____| Measures the per Oa Net Sales Of labor cost to sae Number of Used as a measure of Workers, 2008 — operational growth, tis Number of compared with the 3. Employment Workers, 200A___ investment rate to Growth Rate’ | | — Number of determine whether Workers, 200A capital is being | substituted for labor, e. PROFITABILITY RATIOS - measure earnings in relation to some bas, such as assets, sales, or capital RATIO FORMULA SIGNIFICANCE 1. Profit Margin on Sales or Measures the percentage | Net profit of net income to sales Percentage _ 2. Net Operating te Measures the percentave Income to income to on ee of operating i me sales. 3. Return on Investment or Return on Net Income Indicates whether Total Assets or | Average Totar~ | management is %9 penenoy funds wisely. Invested Assets us ——Cepta | ee ‘variation of the Re" 4 tet Operating BIT on Total Assets Income dhily + interest. | exudes nonsnter, | bearing Debt bearing debt ftom") Oo [ assets, —___|pter 43 -Financial Statements Analysis 703 ral 5. Marginal y_ =a ; Profitability Change in eerr__ | Avariation of the Net Rate Chang Operating Income to Sarma aan ne Catal Total Capital Ratio. | let - - 6. Return on oe Common es eo the return on | the carrying amount of | Equity Average equity. 1g amount of Common Equity. | 7 tage Chae ; jr fetumon | Net Income | variation ofthe return | Equity e Change in ‘on common equity. “ommon Equity Net Income — Dividends on eal Redeemable otal Equity _Preferred St Average Total Equity | Net Operating Profit 5 Economic A measure of the | | Value Added | 2%" (ioe shareholder value i | (Eva) Total Cost of Capital | e20"- * Capital Charge = total | capital employed x Weighted Average Cost a a of Capital f. GROWTH RATIOS - measure the changes in the economic status ofa firm over a period of time rario ForMuLA SIGNIFICANCE tH Po Income Available peflects the company’s “to Common earning power, he, 1. Basic Earnings Stockholders | apuity to generate per Share ‘Average Income from norm (BEPS) Common Shares ‘operations. Outstanding | Le — f . Earnings ‘Shows the relationship of per Share_—— | earrungs per stare 0 2. Earnings Yield "Market Price market price per share. per Shar | Lo —704 PART 3 — Cash provided by FINANCIAL Many, AGM, thr Operations less , Preferred pacity tone Cash Flow per Dividends Capital Outlays, Share Common Shares dividend Payments, } Outstanding | Shows whether af Cash Dividends per ays out most of. im Dividend Common Share earnings in Civicerig Payout Ratio Earnings per Share reinvests the earner” internally. Cash Dividends per Shows the Telatiorsip Common Share of common dividers pa Daiend ied Market Price per Per share to the marcee Common Share Price Of such shares. 6. Ratio of Net Cash provided Measures the ability to Operating Cash by Operations Pay dividends from Flows to Cash Cash Dividends Current operating Dividends sources, . Measures the 7. cone Amount Retained percentage increase it Asset Base assets kept in the business, Measures Te 8. Sustainable Return relationsho ¥ Equity Growth on Dividend the eamnss Rate Common * {- 1- — Payout ) retained art Equity Ratio } the retun | thereon_-Vag, Financial Statements An | Al Me gone 's Analysis 705 ~~ VALUATION RATIOS = measure of sh N \ parcholder value as reflec ort. in the price of the firm’s stock reed Make d Ra : ee some j Measures the amour —~_| 1. Bodk Value per Equi eal aaa aim | Share - Shares ee a Fite Outstanding Brereael bend ends, ~ : or mings Measures how high 1s —_ 2. Market to Book Market Price pris ineeiaton ship Ratio or Price —— per share___ | book value. Well- ens to Book Ratio a managed firms should 5 mere ener sell at high multiples of ms} | their book value. lity to m Measures the ; : relationship between 3. Price-Earnings | ___ Market Price the shares’ market orice aS coerce | rng bese ase in likely to have high PE 2 ratio. Dividend Yield + Measures what Se 4, Retum to ___Capital Gains___| shareholders actually ® Shareholders Measurement eam over a speafied : aie period of years. Reflects the market's valuation of new Market Value of investment. When the Qratio is greater than | 5. QRatio rane (1.0), means | that the firm ss earring returns greater than | _—tt amount invested. __| 6. Return on Dividends per Accakculation of the Shareholders’ share + MV of retum on the pace of & Investment Rejnvested Earnings] common shave (Rosi) price per Share ___-___ oo