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Financial Ratio Analysis
Financial Ratio Analysis
1
Learning Objectives
2
Common-Size and Common-Base-Year
Financial Statements
Income statement items as a percentage of
total sales.
Provides insight into how the relative items
contribute to revenues and expenses.
Balance sheet items as a percentage of total
assets.
Provides a insight into the structure of the
company’s assets and financing.
Common-base-year financial statements
provide such comparisons to a base year.
3
General Procedure
4
Classification of Financial Ratios
Liquidity Ratios
Leverage Ratios
Coverage Ratios
Profitability Ratios
5
Liquidity Ratios
Current Ratio
Quick Ratio
Cash Ratio
6
Current Ratio
Current Assets
Current Ratio
Current Liabilities
s
$ 400
1.58
$ 253
7
Quick Ratio
$ 400 $140
1.03
$ 253
8
Working Capital Ratio
$ 400 $ 253
13.61%
$1,080
9
Cash Ratio
$ 26
2.26%
$1,150
10
Summary of Liquidity Ratios
11
Asset Activity Ratios
12
Receivables Turnover Ratio
$1,080
4.62
$ 234
13
Days Sales Outstanding (DSO)
365
Receivables Turnover
365
79.08
4.62
14
Inventory Turnover Ratio
$ 560
4.00
$140
15
Days Sales In Inventory
365
Inventory Turnover
365
91.25
4.00
16
Fixed Asset Turnover Ratio
Sales
Net Fixed Assets
$1,080
1.44
$ 750
17
Total Asset Turnover Ratio
Sales
Total Assets
$1,080
0.94
$1,150
18
Summary of Asset Activity Ratios
Debt Ratio
Debt-to-Equity Ratio
Equity Multiplier
20
Debt Ratio
Total Debt
Debt Ratio
Total Assets
$ 488.50
0.42
$1,150.00
21
Debt-to-Equity Ratio
Total Debt
Debt / Equity Ratio
Shareholder' s Equity
$ 488.50
0.74
$ 661.50
22
Equity Multiplier
Total Assets
Equity Multiplier
Shareholder’s Equity
$1,150.00
1.74
$ 661.50
23
Summary of Leverage Ratios
24
Coverage Ratios
25
Interest Coverage Ratio
EBIT
Interest Expense
$ 85
5.67
$15
26
Fixed Charge Coverage Ratio
$ 85 $ 6
4.33
$15 $ 6
27
Summary of Coverage Ratios
28
Profitability Ratios
Earning Power
Return on Assets
Return on Equity
29
Gross Profit Margin
Gross Profit
Gross Profit Margin
Sales
$ 520.00
48.15%
$1,080.00
30
Net Profit Margin
Net Income
Net Profit Margin
Sales
$ 42.00
3.89%
$1,080.00
31
Earning Power
EBIT
Earning Power
Total Assets
$ 85.00
7.39%
$1,150.00
32
Return on Assets
Net Income
Re turn on Assets
Total Assets
$ 42.00
3.65%
$1,150.00
33
Return on Equity
$ 36.00
6.35%
$ 641.50
34
Summary of Profitability Ratios Ratios
35
Market Value Ratios
P/E Ratio
Market-to-Book Ratio
Earnings Yield
Dividend Yield
36
P/E Ratio
$ 29.00
12.89
$ 2.25
37
Market-to-Book Ratio
$ 29.00
0.72
$ 40.09
38
Earnings Yield
$ 2.25
7.76%
$ 29.00
39
Dividend Yield
$1.25
4.31%
$ 29.00
40
Summary of Market Value Ratios
41
DuPont Analysis
42
Using Financial Statements
43