7/1/2019

Business Fundamentals for

Analytics
Financial Accounting

Arnold Schneider
Professor
Scheller College of Business

Ratio Analysis

Purpose of Ratio Analysis

Use financial ratios to identify a company’s

strengths and weaknesses and to forecast
future performance.

Types of Ratios:
• Liquidity
• Capital adequacy (Financial leverage)
• Asset quality (Asset management)
• Earnings (Profitability)

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Liquidity Ratios

Liquidity ratios help us analyze a company's ability to meet its short term
obligations
Current Ratio: Total current assets
Total current liabilities
 We want the current ratio to be more than one because we like to have current
assets in a greater amount than current liabilities.

Quick (acid-test) Ratio: Cash + Marketable Securities + Receivables

Total current liabilities
 We want the quick ratio to be above one too.

Capital Adequacy Ratios

Debt Ratio: Total liabilities

Total assets
 We like to see the debt ratio not real
close to one and not real close to
zero.

Interest Coverage Ratio:

Earnings before interest and taxes

Interest expense
 We like the interest coverage ratio to
be well above one.

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Asset Quality Ratios

Inventory Turnover Ratio:

Cost of goods sold
Average inventory
{Days’ Inventory = 365 / Inventory turnover}
 For this ratio, the higher is the better.

Asset Turnover Ratio:

Sales
Average total assets
 For this ratio, the higher is the better.

Earnings Ratios

Profit Margin (Return on Sales) Ratio:

Net income
Sales
 For this ratio, the higher is the better.

Return on Assets Ratio:

Net income
Average total assets
 Allows to meaningfully compare
companies of different sizes

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 7/1/2019

Business Fundamentals for

Analytics
Financial Accounting

Arnold Schneider
Professor
Scheller College of Business

Financial Analysis Case

Case Information

• Nine different industries

• Formulas for ratios – five categories
• Common-sized income statements for 9 companies (items are divided by
Sales)
• Common-sized balance sheets for 9 companies (items are divided by Assets)
• Selected ratios in all 5 categories for 9 companies

Task: Using knowledge about the financial characteristics of different industries,

match each company with its industry.

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Overall Approach

1. Organize the industries into several groups with broadly similar

attributes.
2. Determine the detailed financial characteristics of each of the broad
groups.
3. Identify the firms with the characteristics of the broad groups.
4. Match the 9 firms to the specific industries.

Organize the Industries

Five Groups of Industries:

• Financial
• Retail
• High technology
• Service
• Capital intensive

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Determine Financial Characteristics

Industry Relevant Ratios

Financial Day’s Receivable, Leverage, Asset Turnover
Retail Return on Sales, Gross Margin Ratio, Asset Turnover
High technology Return on Sales, Day’s Inventory, PP&E as a % of assets
Service Receivables, inventories, and PP&E as % of assets
Capital intensive Day’s Inventory, PP&E as a % of assets, Debt to Total
Assets

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Identify and Match Firms

• Analyze relevant ratios for the firms in

each of the 5 industry groups, one group
at a time

• Match the 9 firms to the 9 specific

industries

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