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Ratios

Ratios. Measure strength of various firm aspects Informational needs of creditors and investors Facilitate time-series or cross-sectional analysis Five types Activity Liquidity Debt and solvency Profitability Valuation. Activity Ratios. Inventory turnover – COGS /Avg.Inventory

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Ratios

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  1. Ratios • Measure strength of various firm aspects • Informational needs of creditors and investors • Facilitate time-series or cross-sectional analysis • Five types • Activity • Liquidity • Debt and solvency • Profitability • Valuation

  2. Activity Ratios • Inventory turnover – COGS /Avg.Inventory • Receivables turn – Sales / avg.Receivables • Working Capital turn – Sales / Avg.Working Capital • Fixed Assets turn – Sales / Avg.Fixed Assets • Total Assets turn – Sales / Avg. Total Assets

  3. Examples from handout

  4. Examples from handout

  5. Examples from handout

  6. Liquidity Ratios • Current – Current Asset / Current Liability • Quick – $+securities+AR / Current Liability • Cash – $+securities / Current Liability

  7. Examples from handout

  8. Examples from handout

  9. Debt and Solvency Ratios • Long-term Debt to CapitalLong-term debt + other long-term liab. / Total capital (debt + equity) • Long-term Debt to EquityLong-term debt + other long-term liab. / Total capital (debt + equity) • Times Interest EarnedEBIT / Interest Expense

  10. Examples from handout

  11. Examples from handout

  12. Examples from handout

  13. Profitability Ratios • Gross Margin – Gross Profit / Sales • Operating Margin – Operating Income / Sales • Margin before Interest and Tax – EBIT / Sales • Pre-tax Margin – EBT / Sales • Profit Margin – Net Income / Sales

  14. Examples from handout

  15. Examples from handout

  16. Examples from handout

  17. Valuation Ratios • Price to Earnings (P/E) – Price / EPS • Price to Book (P/B) – Price / Book value per share • Price to Tangible Book – Price / Total Assets – Intangibles - Goodwill

  18. Examples from handout

  19. Examples from handout

  20. Other stuff not covered here, but may want to address in report/presentation • Return on Invested Capital (ROIC) – NOPLAT/ Invested Capitalcovered with spreadsheet later • Return on Assets (ROA) – Net income + After-tax interest / Avg. Total Assets • Return on Equity (ROE) – Net Income / Avg. Total equity

  21. Other stuff not covered here, but may want to address in report/presentation • DuPont system • 2 is greatest when no leverage • 1*2*3 = profit margin • 4 = asset turnover • 3 * 4 = ROA (does not depend on leverage) • 5 = leverage ratio – boosts ROE only if ROA>cost capital

  22. Just because

  23. Still more ratios • PEG – PE ratio / Earnings growthevaluates if price of growth is being realized • Enterprise value / EBITDA(market cap + total debt – Total cash) / EBITDAgood for comparisons if high level of debt or high level of cash • Fixed asset spending / Depreciationhigher may reveal long term planning, but needs to cover at least 3 years

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