Financial Ratios & Financial

Forecasting Using
Additional Funds Need
(AFN)
Financial Management
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 Hello! We are Group 3…

Lalusin, Clarence Almero, Fransin Mikaela Buenaflor, Bhea Irish Joy Delos Reyes, Marielle

Landicho, Aubrey Schianell Manalo, Danica Titular, Grachelle Magabo, Sheila Marie
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 Our talking points for tonight…

Du Pont Model Financial Forecasting Using

Financial Ratios
Additional Funds Needed
(AFN)
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 1
Financial Ratios
Reporters: Grachelle S. Titular
Clarence Lalusin
Bhea Irish Joy Buenaflor
Aubrey Schianelle Landicho
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 Ratio Analysis
● a commonly used tool of financial statement analysis.
● a mathematical relationship between one number to
another number.
● involves methods of calculating and interpreting financial
ratios to analyze and monitor a firm’s performance
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Titular, Grachelle
 Ratio can be classified into various types.
Classification from the point of view of financial management is as
follows:
● Liquidity Ratio
● Activity Ratio
● Solvency Ratio
● Profitability Ratio
Take note: There should be consistency in the computation as well as usage of ratios to
ensure comparability between results and prevent their misinterpretations.
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 Liquidity Ratio

Liquidity Ratio
● It is also called as short-term ratio.
● It is a type of financial ratio used to determine a company's
ability to pay its short-term debt obligations.
Liquidity ratios are used to address a very basic question about
the firm's financial health: How liquid is the firm?

How can we determine whether a firm is more liquid or less liquid

than other firms?
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 Liquidity Ratio
Measuring the Overall Liquidity of a Firm’s:

(1) Current Ratio.

- the most commonly used measure of a firm’s over-all liquidity

- The current ratio is a liquidity that measures a company’s ability to pay
short-term obligations or those due within one year. It compares the
current assets of the company to its current liabilities.

Formula: Current Ratio = Current Assets / Current Liabilities

Take Note: Current Ratio > 1 ----- Good
Current Ratio < 1 ------ Bad
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 Liquidity Ratio
Measuring the Overall Liquidity of a Firm’s:
Example

Example No. 1 using the Current Ratio:

Company A Company B
Current Assets 200 million 200 million
Current Liabilities 100 million 400 million
Current Ratio 2.0 0.5
The business can pay its
The business can pay off its current liabilities 0.5 times,
current liabilities twice with its or 50% of its current
current assets. liabilities using the
company’s most liquid
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assets

Formula: Current Ratio = Current Assets / Current Liabilities

 Liquidity Ratio
Measuring the Overall Liquidity of a Firm’s:
Example No. 2 using the Current Ratio:
Given: Stocks/Inventory = 50,000 Trade Receivables = 10,000
Cash = 20,000 Short-term debt = 50,000
Unearned Revenue = 50,000

Compute for the Current Ratio:

Current Ratio = Current Assets / Current Liabilities
= Stocks + Trade Receivables + Cash / Short-term Debt +
Unearned Revenue
= 50,000 + 10,000 + 20,000 / 50,000 + 50,000
= 80,000 / 100,000
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Current Ratio = 0.8

 Liquidity Ratio
Measuring the Overall Liquidity of a Firm’s:
(2) Acid-Test (Quick) Ratio
Ratio.
- represents the extent to which a business can pay its short-term
obligations with its most liquid assets.

Formula: Liquid Asset / Current Liability

wherein, Liquid Asset = Current Asset – Inventory

Take Note: Quick Ratio > 1 ------Good

Quick Ratio < 1 ------Bad
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 Liquidity Ratio
Measuring the Overall Liquidity of a Firm’s:
Example
Example No. 1 using the Quick Ratio: Calculate the Quick Ratio

Cash = 400million Marketable Securities = 140million

Cash Equivalents = 100million Inventories = 120million
Accounts Receivable = 60million Current Liabilities = 280million
Quick Ratio = Liquid Assets / Current Liabilities
= Cash + Cash Equivalents + Acc. Receivable + M. Securities – Inventory /
Current Liabilities
= 400m + 100m + 60m + 140m – 120m / 280m
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= 580m / 280m
Quick Ratio = 2.07
 Liquidity Ratio
Measuring the Overall Liquidity of a Firm’s:
Example (Current Ratio and Quick Ratio)

Company XYZ has Php 500million in current assets, Php 50million in their inventory,
and Php 30million in prepaid expenses. Also, it has Php 300million in current
liabilities.

(a) What is the current ratio for this company?

(b) What is the quick ratio for this company?

Solution:
(a) Current Ratio = Current Assets / Current Liabilities
= 500m / 300m
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Current Ratio = 1.67 (good)

 Liquidity Ratio
Measuring the Overall Liquidity of a Firm’s:
Example (Current Ratio and Quick Ratio)
Company XYZ has Php 500million in current assets, Php 50million in their inventory,
and Php 30million in prepaid expenses. Also, it has Php 300million in current liabilities.

(a) What is the current ratio for this company?

(b) What is the quick ratio for this company?

Solution:
(b) Quick Ratio = Liquid Assets / Current Liabilities
= Current Assets – Inventory – Prepaid Expenses / Current Liabilities
= 500m- 50m – 30m / 300m
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Quick Ratio = 1.4

 Liquidity Ratio
Measuring the Overall Liquidity of a Firm’s:
(3) Cash Ratio.

- it is sometimes referred to as the cash asset ratio, measures a

company’s ability to pay off its short-term debt obligations with cash
and cash equivalents.

Formula: 𝑪𝒂𝒔𝒉 𝒂𝒏𝒅 𝑪𝒂𝒔𝒉 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔

𝑪𝒂𝒔𝒉 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒆𝒔
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 Liquidity Ratio
Measuring the Overall Liquidity of a Firm’s:
Example (Cash Ratio)
ABC Enterprise showed the following items in its
balance sheet for December 31, 2021:
✓ Compute for the ABC Enterprise’ Cash Ratio:

✓ 𝑪𝒂𝒔𝒉 𝒂𝒏𝒅 𝑪𝒂𝒔𝒉 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔

𝑪𝒂𝒔𝒉 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
✘

✘
40,000 + 15,000
=
60,000
✘
55,000
=
60,000
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Cash Ratio = 0.92

 Activity Ratio

Activity Ratio
● refers to the type of the financial ratios which are used by the

company in order to determine the efficiency with which the

company is able to use its different operating assets that are
present in its balance sheet and convert the same into the sales or
the cash.
● help in evaluating a business’s operating efficiency by analyzing

fixed assets, inventories, and accounts receivables. It not just

expresses a business’s financial health but also indicates the
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utilization of the balance sheet components

Lalusin, Clarence
 Activity Ratio

Activity Ratio

● Measure the efficiency of the company in converting its resources into

sales or cash (operations)
● Relationship between Income Statement and Balance Sheet Accounts
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 Activity Ratio

CTIVITY RATIOS

Income Statement items

Balance sheet items

Average
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 Activity Ratio
Accounts Receivable Turnover Ratio
This tests the company’s speed and efficiency in collection of accounts

𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠, 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 + 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠, 𝐸𝑛𝑑𝑖𝑛𝑔

=
2
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 Activity Ratio
Day Sales Outstanding
Measures the average number of days to collect a receivable

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

𝐷𝑎𝑦 𝑆𝑎𝑙𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 =
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
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 Activity Ratio
Day Sales Outstanding
“Number of days in a year”

What do we use, 360 days or 365 days?

1. Given
2. If none, assume 365 days.
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 Activity Ratio
Inventory Turnover Ratio
Measures the firm’s efficiency in managing and selling its inventories

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦, 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 + 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦, 𝐸𝑛𝑑𝑖𝑛𝑔

=
2
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 Activity Ratio
Days Supply in Inventory
Measures the average number of days to sell or consume the average
inventory
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
𝐷𝑎𝑦 𝑆𝑢𝑝𝑝𝑙𝑦 𝑖𝑛 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 =
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
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 Activity Ratio
Accounts Payable Turnover Ratio
Measures the firm’s efficiency in meeting its accounts payable

𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒, 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 + 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒, 𝐸𝑛𝑑𝑖𝑛𝑔

=
2
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 Activity Ratio
Average Payment Period
Measures the average number of days to sell or consume the average
inventory.
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 =
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
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 Activity Ratio
Plant/Fixed Asset Turnover Ratio
Measures the level of use of Property, Plant and Equipment used in
operations.
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠

𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠, 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 + 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠, 𝐸𝑛𝑑𝑖𝑛𝑔

=
2
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 Activity Ratio
Investment/Asset Turnover Ratio
Measures the firm’s efficiency in using its available resources (assets)
to generate sales.
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠, 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 + 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠, 𝐸𝑛𝑑𝑖𝑛𝑔

=
2
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 Activity Ratio
Capital Intensity Ratio
Measures the intensity of the company’s use of investment to generate
revenue for the company.

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 =
𝑁𝑒𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
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 Activity Ratio
Example

Compute for:
➢ Accounts Receivable Turnover and
Day Sales Outstanding
➢ Inventory Turnover and Days
Supply in Inventory
➢ Accounts Payable Turnover and
Average Payment Period
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 Activity Ratio
Example

Accounts Receivable Turnover Ratio

100,000 + 200,000
=
2
= 150,000

Accounts Receivable Turnover

𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
900,000
=
150,000
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=6
 Activity Ratio
Example

Days Sales Outstanding

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
=
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟

360 𝑑𝑎𝑦𝑠
=
6
= 60 𝑑𝑎𝑦𝑠
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 Activity Ratio
Example

Inventory Turnover Ratio

120,000 + 240,000
=
2
= 180,000

Inventory Turnover
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠
=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
720,000
=
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180,000
=4
 Activity Ratio
Example

Days Supply in Inventory

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
=
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
360 𝑑𝑎𝑦𝑠
=
4
= 90 𝑑𝑎𝑦𝑠
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 Activity Ratio
Example

Accounts Payable Turnover Ratio

60,000 + 100,000
=
2
= 80,000

Accounts Payable Turnover

𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒
400,000
=
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80,000
=5
 Activity Ratio
Example

Average Payment Period

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
=
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
360 𝑑𝑎𝑦𝑠
=
5
= 72 𝑑𝑎𝑦𝑠
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 Solvency Ratio

Solvency Ratio
● Solvency Ratio is a key metric to used to measure an enterprise’s

ability to meet its debt obligations and is used often by prospective

business lenders.
● It is also called as leverage ratio or stability ratio, which also helps

to understand how the long-term funds are used in the business

concern.
● The idea behind analyzing a company's solvency ratio is to assess

its capacity to stay afloat and not go bankrupt because of

crumbling revenue and profits.
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Buenaflor, Bhea Irish Joy

 Solvency Ratio

1. Time Interest Earned

Types of 2.Debt Ratio
Solvency Ratio 3.Equity Ratio
4.Debt to Equity Ratio
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 Solvency Ratio
1.Time Interest Earned
• Also known as interest coverage ratio
• Evaluates the ability of a company to pay the interest on its debt
obligations based on its current income.
𝐸𝑎𝑟𝑛𝑒𝑑 𝑏𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥𝑒𝑠 (𝐸𝐵𝐼𝑇)
𝑇𝑖𝑚𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒

Note:
• Both of these figures can be found on the income statement.
• Generally favorable: higher result
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• Preferred result generally a minimum of 1.25x by lenders and bankers

 Solvency Ratio
1.Time Interest Earned
Example:
𝐸𝐵𝐼𝑇
ABC Corporation showed the following income 𝑇𝑖𝑚𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 =
statement for the year just ended 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
15,000
𝑇𝑖𝑚𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 =
6,000
𝑇𝑖𝑚𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 = 2.5

Interpretation: The operating income

can cover the interest expense 2.5
times over.
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 Solvency Ratio
2. Debt Ratio
• The term debt ratio refers to a financial ratio that measures the extent of
a company’s leverage.
• Measures the percentage of assets funded by creditors.
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Note:
• Both of these figures can be found on the balance sheet.
• Favorable: lower result
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 Solvency Ratio
2. Debt Ratio
Example:
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 Solvency Ratio
3. Equity Ratio
• The solvency ratio that helps measure the value of the assets financed
using the owner's equity.
• Also known as Proprietary Ratio
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Note:
• Both of these figures can be found on the balance sheet.
• Favorable: higher result
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 Solvency Ratio
3. Equity Ratio
Example:

Equity Ratio
Equity Ratio= Total Equity/Total Assets
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 Solvency Ratio
4. Debt to Equity Ratio
• Measures the relationship of total liabilities to shareholders’ equity.

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
𝐷𝑒𝑏𝑡 𝑡𝑜 𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 =
𝑂𝑤𝑛𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

Note:
• Both of these figures can be found on the balance sheet.
• Favorable: lower result
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• Lower results indicate less risk in operations

 Solvency Ratio
4. Debt to Equity Ratio
Example:
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 Profitability Ratio
Profitability Ratio
● Profitability is the net result of a number of policies and
decisions. The ratios examined thus far provide useful clues
as to the effectiveness of a firm's operations, but the
profitability ratios show the combined effects of liquidity,
asset management, and debt on operating results.
● This are financial ratios that are used by the investors for
evaluating a company's ability for generating income profit in
relation to its revenue, operating costs, balance sheet assets,
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and equity shareholders' during a particular period of time.

Landicho, Aubrey Schianell
 Profitability Ratio

Gross Profit Margin

It measures the ability to control costs and inventories and to pass
along price increase to customers
Formula:
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 Profitability Ratio

Gross Profit Margin Example:

Given:
Gross Profit = $400
Sales = $1,000

Gross Profit Margin = ( 400/1,000 )×100

Gross Profit Margin = 40%
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 Profitability Ratio

Operating Profit Margin

It measures the overall efficiency and incorporates all the expenses
associated with ordinary business activities.
Formula:
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 Profitability Ratio

Operating Profit Margin Example:

Given:
Operating Profit = $200
Sales = $1,000

Operating Profit Margin= ( 200/1000 ) × 100

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Operating Profit Margin= 20%

 Profitability Ratio

Net Profit Margin

It measures profitability after considering all revenues and expenses
including interest, taxes and extraordinary items.
Formula:
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 Profitability Ratio

Net Profit Margin Example:

Given:
Net Income = $140
Sales = $1,000

Net Profit Margin = ( 140/1,000 ) ×100

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Net Profit Margin = 14%

 Profitability Ratio

Return on Assets (ROA)

It measures the profitability relative to total assets.
Formula:

In case the company has an interest-bearing debt:

(Net Income + Interest expense after tax) / Average total assets
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 Profitability Ratio

Return On Assets (ROA) Example:

Given:
Net Income = 140
Assets = 1,000

Return on Assets = ( 140/1,000 ) × 100

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Return on Assets = 14%

 Profitability Ratio

Return On Equity (ROE)

It measures efficiency in generating returns on the investment received

from shareholders.

Formula:
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 Profitability Ratio

Return On Equity (ROE) Example:

Given:
Net Income = $140
Shareholder's Equity = $ 700

Return on Equity = ( 140/700 ) × 100

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Return on Equity = 20%

 The DuPont
Disaggregation
Analysis
Reporters: Danica Manalo
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 The DuPont Disaggregation Analysis

DuPont Equation is the formula that shows that the rate of return on equity can be
found as the product of profit margin, total assets turnover and the equity multiplier.
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Manalo, Danica
 These three components are described as follows:

1. Profit Margin is the amount of profit that the company

earns from each peso of sales.
2. Asset Turnover is a productivity measure that reflects
the volume of sales that a company generates from each
peso invested in assets.
3. Financial Leverage measures the degree to which the
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company finances its assets with debt rather than equity.

EXAMPLE (ROE):
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 Return On Assets

Return on assets measures the return on investment for the company

without regard to how it is financed (the relative proportion of debt an
equity in its capital structure)
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EXAMPLE (ROA):
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 Almero, Fransin Mikaela Delos Reyes, Marielle Magabo, Sheila Marie

Financial
Forecasting
Using AFN
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Thank you!
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