1 / 30

Ratio Analysis

Ratio Analysis. Chapter 6 Robinson, Munter, Grant. Learning Objectives. Identify situations in which ratio analysis is useful Understand the purpose of ratio analysis Calculate specific ratios Recognize limitations of accounting data in ratio analysis. Ratio Analysis.

caspar
Télécharger la présentation

Ratio Analysis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Ratio Analysis Chapter 6 Robinson, Munter, Grant

  2. Learning Objectives • Identify situations in which ratio analysis is useful • Understand the purpose of ratio analysis • Calculate specific ratios • Recognize limitations of accounting data in ratio analysis Chapter 6

  3. Ratio Analysis • Cross-sectional and time series analysis • Controls for size differences • Controls for currency differences • Evaluate related components of different financial statements simultaneously • Ratios are easily (and commonly) modified Chapter 6

  4. Ratio Analysis Categories • Activity (operations and asset management) • Liquidity (meeting short-term obligations) • Solvency (meeting long-term obligations) • Profitability (earnings and cost coverage) • Cash Flow (quality of earnings) • Price Multiples (stock price) Chapter 6

  5. Activity RatiosHow day-to-day operations function • Inventory management • Inventory Turnover • Compares income statement and balance sheet amounts • Must average balance sheet figures ((Beg + End)/2) • Turnover = COGS/Average total inventory • Days inventory = 365/Turnover • How many days was inventory held before being sold? Chapter 6

  6. Activity RatiosCritical operating cash accounts • Accounts receivable turnover • How many times a credit sale is made and subsequently collected • [credit sales/average accounts receivable] • May have to use total sales rather than credit sales • Consistency is important • Days receivable • Number of days between the charge sale and collection • [365/accounts receivable turnover] Chapter 6

  7. Activity RatiosCritical operating cash accounts • Accounts payable turnover • Number of times a credit purchase is made and subsequently paid • [credit purchases/average accounts payable] • Often assume all purchases are on credit • Purchases = [COGS + Ending Inv. - Beginning Inv.] • Days payable • Number of days between credit purchase and payment • [365/accounts payable turnover] Chapter 6

  8. Activity RatiosCash Cycle • Also a measure of liquidity • If low, small number of days in operating cycle to finance [Days inventory + Days receivable - Days payable] Chapter 6

  9. Activity RatiosAsset Turnover • Long-term • Revenues generated by long-term assets • [Sales revenue/Average noncurrent assets] • Total assets • Efficiency of generating revenues given total assets • [Sales revenue/Average total assets] Chapter 6

  10. Liquidity Ratios • Current ratio • Ability to meet short-term obligations • [Current assets/current liabilities] • Quick ratio • Remove less liquid assets • Keep cash, liquid investments, A/R • [(Current assets-inventory-ppd expenses-other)/current liabilities] • [(Cash+short-term investments + A/R)/current liabilities] Chapter 6

  11. Liquidity Ratios • Defensive interval ratio • Compare 1 day’s costs to quick assets • [((COGS+SGA+RD)/365)/(Cash+short-term investments + A/R)] • For Motorola, defensive interval = .0075 • COGS = 21,445 • SG&A = 3,703 • R&D = 4,318 • Quick assets = 10,745 (6,082 + 80 + 4,583) Chapter 6

  12. Solvency Ratios • Debt to assets: Total liabilities/Total assets • Proportion of assets financed with debt • Could include interest bearing debt only [(short term debt + noncurrent debt)/total assets] • Be aware that assets are recorded at historical cost, which may be different from current market value Chapter 6

  13. Solvency Ratios • Debt to equity: Total liabilities/Total equity • A measure of how assets are financed • Or… (current debt + noncurrent debt)/Total equity • Examine relative sizes of debt and equity financing • Capitalization ratio: [(current debt+noncurrent debt)/ (current debt+noncurrent debt+total equity)] Chapter 6

  14. Solvency RatiosCoverage Ratios • Adequacy of resources for meeting firm’s contractual obligations • Times interest earned • Can the firm cover its interest obligations? • (EBIT/Interest expense) • Cash interest coverage • (Cash from ops + interest paid + tax paid)/Interest paid Chapter 6

  15. Solvency RatiosCoverage Ratios • Target a specific expense • [(EBIT+Rent expense)/(Interest expense+rent expense)] • Target principal on debt that is about to be repaid • [EBIT/(interest expense + principal payments)] Chapter 6

  16. Profitability RatiosCommon-size • From chapter 5… • Income statement • Divide item of interest by sales • ROS = Net income/Sales revenue • Gross margin = Gross profit/Sales revenue • Balance sheet • Divide item of interest by total assets Chapter 6

  17. Profitability RatiosReturn Ratios • ROA = Net income/Average total assets • Or, [(Net income + After-tax interest expense)/Average total assets] • Also, [EBIT/Average total assets] reflects pre-tax, pre-interest return Chapter 6

  18. Profitability RatiosReturn Ratios • ROE = Net income/Average total equity • Return generated relative to the capital provided by the owners over time • Or, if firm has preferred stock [(Net income – Prfd dividends)/Average total common equity] • ROMVE = Net income/Market value of equity Chapter 6

  19. Cash Flow RatiosQuality of earnings • Ability to pay obligations • CFO/Total liabilities • CFO = Cash flows from operations • Profitability (cash flow relative to sales) • CFO/Sales revenue • Cash return on assets • CFO/Average total assets Chapter 6

  20. Cash Flow RatiosQuality of earnings • Cash flow-earnings index • CFO/Net income • Free cash flow ratio • CFO/Capital expenditures • If ratio>1, free cash flow exists Chapter 6

  21. Price Multiple Ratios • Market’s valuation of a firm’s common stock • P/E = Share price/Earnings per share • Price/book ratio compares stock’s price to the recorded value of the net assets [Share price/(Book value of equity/Share outstanding)] • Price/sales = Share price/Sales per share • Also, compare price to cash flow per share Chapter 6

  22. Ratio Integration DuPont analysis (decomposition) ROE = ROA x Leverage And more… Chapter 6

  23. Ratio Integration ROA = Profitability x Turnover Chapter 6

  24. Analysis • Generally compare 3-5 years • Requires 4-6 years of data • Balance sheet numbers may be averaged • Compare Motorola and Nokia • Activity • Liquidity • Solvency • Profitability Chapter 6

  25. Activity Ratios Chapter 6

  26. Liquidity Ratios Chapter 6

  27. Solvency Ratios Chapter 6

  28. Profitability Ratios Chapter 6

  29. Limitations to consider • Historical cost of balance sheet items • GAAP vs. IAS rules • Accounting method differences • LIFO vs. FIFO inventory valuation Chapter 6

  30. Summary • Calculate ratios • Decompose and interpret results • Understand limitations of ratio analysis Chapter 6

More Related