Financial Ratios
Ratio Analysis <ul><li>Measure firm performance </li></ul><ul><li>Compare over time </li></ul><ul><li>Compare with other f...
Ratios <ul><li>Profitability </li></ul><ul><li>Activity or Utilization </li></ul><ul><li>Liquidity </li></ul><ul><li>Lever...
<ul><li>1.  Profit Margin (PM)  = </li></ul><ul><li>2. Operating Profit Margin  </li></ul><ul><li>(not in the book) = </li...
Liquidity Ratios <ul><li>Current Ratio  = </li></ul><ul><li>Quick Ratio  = </li></ul><ul><li>Cash Ratio  = </li></ul>
Activity or Utilization Ratios <ul><li>Receivables Turnover  = </li></ul><ul><li>Average Collection Period  = </li></ul><u...
Leverage Ratios <ul><li>Debt Ratio (DR) = </li></ul><ul><li>Long-term Debt Ratio* = </li></ul><ul><li>Time Interest Earned...
Growth Rates <ul><li>1.  Percentage growth of Sales, Net Income, etc. </li></ul><ul><li>Example:  </li></ul><ul><li>2. Sus...
Sustainable Growth <ul><li>Growth financed through: </li></ul><ul><ul><li>Internal equity funds </li></ul></ul><ul><ul><li...
Valuation Ratios <ul><li>Price Earnings (PE) = </li></ul><ul><li>Market to Book = </li></ul>
P/E Ratio 5x 10x P/E $25 $50 Price Low High Growth $5 $5 EPS B A
Price-earnings Ratios for Selected U.S. Companies   Coca-Cola  . . . . . Beverages 13 17 20 25 34 53 27 Disney  . . . . . ...
Comparison of Market Value to Book Value per Share 8.33 28.11 Yahoo, Inc. 57.98 56.13 Colgate-Palmolive 7.01 10.33 Oracle ...
Du Pont Analysis <ul><li>ROE = </li></ul><ul><li>ROE = </li></ul><ul><li>  = </li></ul><ul><li>3. ROE = </li></ul>Profit M...
Sustainable Growth and Du Pont Sales Asset Asset  Equity PAT Sales 1 - PO
Microsoft Income Statements (in millions)
Microsoft Balance Sheet (in millions)
Wal-Mart Stores Income Statement (in thousands)
Wal-Mart Stores Balance Sheet  (in thousands)
Wal-Mart Stores Balance Sheet (cont.) (in thousands)
Du Pont Examples Microsoft  ROE = 24.6% * 0.867 * 1.21 = 25.7% Wal-Mart  ROE = 3.5% * 2.547 * 2.46 = 21.8%
How Are They Doing Now? Microsoft Wal-Mart
Things to Consider Concerning  Financial Ratios <ul><li>What aspect of the firm or its operations are  </li></ul><ul><li>w...
Income Statement for the Year 2004 Discrepancies 1. Revenue recognition (i.e., installment sales and leases) 2. Cost of go...
Trends in Annual Reports <ul><li>Interactive On-line Reports  http:// www.intel.com/intel/finance </li></ul><ul><li>Plain ...
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Ratio Analysis

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Ratio Analysis

  1. 1. Financial Ratios
  2. 2. Ratio Analysis <ul><li>Measure firm performance </li></ul><ul><li>Compare over time </li></ul><ul><li>Compare with other firms or industries </li></ul><ul><li>Analyze ROE </li></ul><ul><li>Project financial statements into future </li></ul>
  3. 3. Ratios <ul><li>Profitability </li></ul><ul><li>Activity or Utilization </li></ul><ul><li>Liquidity </li></ul><ul><li>Leverage </li></ul><ul><li>Growth </li></ul><ul><li>Valuation </li></ul>
  4. 4. <ul><li>1. Profit Margin (PM) = </li></ul><ul><li>2. Operating Profit Margin </li></ul><ul><li>(not in the book) = </li></ul><ul><li>3. Return on Assets </li></ul><ul><li>(ROA) = </li></ul><ul><li>4. Return on Equity </li></ul><ul><li>(ROE) = </li></ul>Profitability Ratios
  5. 5. Liquidity Ratios <ul><li>Current Ratio = </li></ul><ul><li>Quick Ratio = </li></ul><ul><li>Cash Ratio = </li></ul>
  6. 6. Activity or Utilization Ratios <ul><li>Receivables Turnover = </li></ul><ul><li>Average Collection Period = </li></ul><ul><li>Inventory Turnover* = </li></ul><ul><li>Fixed Asset Turnover = </li></ul><ul><li>Total Asset Turnover = </li></ul>* Sometimes =
  7. 7. Leverage Ratios <ul><li>Debt Ratio (DR) = </li></ul><ul><li>Long-term Debt Ratio* = </li></ul><ul><li>Time Interest Earned (XIE) = </li></ul><ul><li>Cash Coverage = </li></ul><ul><li>Fixed Charge Coverage (not in the book) = </li></ul><ul><li>Debt to Equity = </li></ul><ul><li>Equity Multiplier (EM) = </li></ul><ul><li>*Also called Debt to Capital Ratio </li></ul>
  8. 8. Growth Rates <ul><li>1. Percentage growth of Sales, Net Income, etc. </li></ul><ul><li>Example: </li></ul><ul><li>2. Sustainable Growth = ROBE(1-PO) </li></ul><ul><li>where PO is the payout ratio = Div/NI </li></ul>
  9. 9. Sustainable Growth <ul><li>Growth financed through: </li></ul><ul><ul><li>Internal equity funds </li></ul></ul><ul><ul><li>Supportable debt </li></ul></ul><ul><li>Such that: </li></ul><ul><ul><li>Firm’s debt ratio is held constant </li></ul></ul><ul><li>SG </li></ul><ul><li>(Grant’s approx.) </li></ul><ul><li>(Book’s formula) </li></ul><ul><li>Where b is the “plowback” or retention ratio </li></ul>
  10. 10. Valuation Ratios <ul><li>Price Earnings (PE) = </li></ul><ul><li>Market to Book = </li></ul>
  11. 11. P/E Ratio 5x 10x P/E $25 $50 Price Low High Growth $5 $5 EPS B A
  12. 12. Price-earnings Ratios for Selected U.S. Companies Coca-Cola . . . . . Beverages 13 17 20 25 34 53 27 Disney . . . . . . Entertainment 25 20 19 26 23 38 23 Liz Claiborne . . . Clothing 13 19 11 19 17 29 13 McDonald’s . . . . Restaurants 10 16 18 20 24 28 22 NationsBank . . . Banking 7 10 9 10 10 21 Phelps Dodge . . . Copper 6 8 4 17 7 23 35 Southwest Air . . . Airlines 20 14 15 38 21 21 27 Texas Utilities . . . Public Utilities 6 7 8 15 14 14 Wal-Mart . . . . . Retail 26 28 24 39 18 38 25 Standard & Poor’s . . . (500 Stock Index) 11 14 15 22 17 25 20 Jan. Jan. Jan. Jan. Jan. June July Corporation Industry 1983 1986 1990 1993 1996 1998 2004
  13. 13. Comparison of Market Value to Book Value per Share 8.33 28.11 Yahoo, Inc. 57.98 56.13 Colgate-Palmolive 7.01 10.33 Oracle Corp 3.77 32.11 Pfizer 1.78 36.58 Monsanto 1.71 13.57 Steelcase, Inc. .74 11.01 Wolverine Tube - 46.02 Amazon, Inc. 4.64 $ 27.95 Microsoft Ratio of Market Value to Book Value July 2004 Market Value per Share Corporation
  14. 14. Du Pont Analysis <ul><li>ROE = </li></ul><ul><li>ROE = </li></ul><ul><li> = </li></ul><ul><li>3. ROE = </li></ul>Profit Margin * Total Asset Turnover * Equity Multiplier (PM) (TAT) (EQ)
  15. 15. Sustainable Growth and Du Pont Sales Asset Asset Equity PAT Sales 1 - PO
  16. 16. Microsoft Income Statements (in millions)
  17. 17. Microsoft Balance Sheet (in millions)
  18. 18. Wal-Mart Stores Income Statement (in thousands)
  19. 19. Wal-Mart Stores Balance Sheet (in thousands)
  20. 20. Wal-Mart Stores Balance Sheet (cont.) (in thousands)
  21. 21. Du Pont Examples Microsoft ROE = 24.6% * 0.867 * 1.21 = 25.7% Wal-Mart ROE = 3.5% * 2.547 * 2.46 = 21.8%
  22. 22. How Are They Doing Now? Microsoft Wal-Mart
  23. 23. Things to Consider Concerning Financial Ratios <ul><li>What aspect of the firm or its operations are </li></ul><ul><li>we attempting to analyze? </li></ul><ul><ul><ul><ul><li>Generally, the aspects are “fuzzy”, e.g., utilization </li></ul></ul></ul></ul><ul><li>What goes into a particular ratio? </li></ul><ul><ul><ul><ul><li>Historical cost? Market values? What accounting conventions? </li></ul></ul></ul></ul><ul><li>What is the unit of measurement? </li></ul><ul><ul><ul><ul><li>Dollars? Days? Turns? </li></ul></ul></ul></ul><ul><li>What would a desirable ratio value be? </li></ul><ul><ul><ul><ul><li>Always? </li></ul></ul></ul></ul>
  24. 24. Income Statement for the Year 2004 Discrepancies 1. Revenue recognition (i.e., installment sales and leases) 2. Cost of goods sold (i.e., may use LIFO during inflation) 3. Extraordinary losses
  25. 25. Trends in Annual Reports <ul><li>Interactive On-line Reports http:// www.intel.com/intel/finance </li></ul><ul><li>Plain Speaking http://www.berkshirehathaway.com/2003ar/2003ar.pdf </li></ul><ul><li>Filings, i.e. 10k annual reports http://www.edgar-online.com/bin/esearch/fullsearch.asp </li></ul>
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