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Financial Ratio Analysis

Financial Ratio Analysis

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Financial Ratio Analysis

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  1. Financial Ratio Analysis How can published financial statements be used to assess financial performance?

  2. Financial Ratio Types • Market Value • Profitability • Asset Activity • Leverage • Liquidity

  3. Market Value Ratios • Examples: Market-to-Book; Price-Earnings • Questions: How do securities markets value the company’s assets? Earnings?

  4. Profitability Ratios • Examples: Return on assets, equity, invested capital; gross, net profit margin • Questions: How profitable is the company per dollar invested in the business; per dollar of sales?

  5. Asset Activity Ratios • Examples: asset turnover, average collection period, inventory conversion period, payables deferral period • Questions: How efficiently does the company use its assets? How long does it take assets or liabilities to turn into cash?

  6. Leverage Ratios • Examples: Debt/assets; Debt/equity; Interest coverage • Questions: How much of a burden does debt pose relative to assets, equity or cash flow? How risky is the company?

  7. Liquidity Ratios • Examples: Current ratio, quick ratio, interval measure • Questions: How easily can the company meet its immediate cash requirements? How risky is the company?

  8. Financial Ratios Relative to What? • By themselves, financial ratios have no meaning. We need to compare to: • Past data for the same company • Data for similar companies (e.g., same industry) • Other ratios (i.e., DuPont ratios, Cash Conversion Cycle)

  9. A Good Source of Company Ratios www.investor.reuters.com

  10. Dell and Gateway: Margin Trends

  11. Dell, Gateway and Computer Hardware

  12. DuPont Ratios Net Income x Sales x Assets = Net Income Sales Assets Equity Equity Net profit X Asset x Equity = ROE margin turnover multiplier

  13. DuPont Analysis: Selected Companies

  14. Cash Conversion Cycle: Selected Companies