Chapter# 3

The Fundamental Analysis

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part. 1
Corporate Finance-Fundamental Analysis

1- Liquidity
2- Profitability

3- Assets Management Efficiency

4- Leverage

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part. 2
Corporate Finance-Fundamental Analysis

1- Liquidity
-Current Ratio: measures the ability of a company to pay short-term obligations using
current assets. In most cases, the higher the current ratio, the better the liquidity position.
Current Ratio (CR) = Current Assets ÷ Current Liabilities
-Quick Ratio: measures the ability of a company to pay short-term obligations using the
more liquid types of current assets
Quick Ratio (QR) = Quick Assets ÷ Current Liabilities
-Working Capital: Determines if a company can meet its current obligations with
its current assets; and how much excess or deficiency there is.
Working Capital (WC) = Current Assets - Current Liabilities

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part. 3
Corporate Finance-Fundamental Analysis
2- Profitability

-Return o n Equity: measures how much profit generated per dollar of equity. This is the most used
profitability ratio. The higher the ROE ratio, the better the profitability.
Return on Equity (ROE) = Net Income ÷ Stockholders' Equity
-Return o n Sales (net profit margin): measures the percentage of income derived from dollar sales.
Return on Sales (ROS) = Net Income ÷ Net Sales
-Return o n Total Assets: measures how much profit generated per dollar invested in total assets.
Return on Assets (ROA) = Net Income ÷ Total Assets
-Return o n Fixed Assets: measures how much profit generated per dollar invested in fixed assets.
Return on Assets (ROA) = Net Income ÷ Fixed Assets
-Return o n Current Assets: measures how much profit generated per dollar invested in current assets.
Return on Assets (ROA) = Net Income ÷ Current Assets
-Return o n Capital: measures how much profit generated per dollar invested in capital. Return on
Assets (ROC) = Net Income ÷ Capital (equity+ long-term debt)

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part. 4
Corporate Finance-Fundamental Analysis

3- Assets Management Efficiency

-Total Asset Turnover: measures the amount of sales generated per dollar invested in
assets. The higher the TAT ratio, the better the assets management.
Total Asset Turnover (TAT) = Net Sales ÷ Total Assets

4- Leverage
Debt-to-Equity Ratio: evaluates the capital structure, where such a ratio of more than 1
implies that the company is a leveraged firm and less than 1 implies that the company is
conservative. The Lower the leverage ratio, the better the long-term financing position.
Debt-Equity Ratio (DTE) = Long-term debt ÷ Total Equity
Debt-to-Total Assets Ratio: measures the portion of company assets that are financed
by long-term debt.
Debt-Assets Ratio (DTTA) = Long-term debt ÷ Total Assets

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part. 5