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Ratio Analysis
 

Ratio Analysis

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For MBA pursuing Mgt Trainees

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    Ratio Analysis Ratio Analysis Presentation Transcript

    • Financial Ratio Analysis
      • Interested parties
        • Shareholders - to measure management’s performance
        • Investors - to make their investment decisions
        • Management - to plan and control operation
      Ratio analysis is a quick and easy way of analyzing a firm’s financial statements.
    • Cautions For Ratio Analysis
      • Ratio analysis cannot accurately pinpoint the problems of the firm. It is reasonable to expect that it points to a direction for a more detailed analysis.
      • Financial ratio itself is not meaningful without comparing it to a benchmark. Benchmarks can be a rival firm’s financial ratio or an industry average.
      • Sometimes a firm’s problems can be disguised as so-called “good ratios.” For example, a high inventory turnover can be an indicator of the firm’s dangerously low level of inventory.
    • Categories of Financial Ratios
      • Liquidity Ratios
      • Efficiency Ratios
      • Leverage Ratios
      • Profitability Ratios
      • Liquidity and leverage ratios primarily measure risk; efficiency and profitability ratios measure performance and return.
    • Liquidity Ratios
      • Net working capital
      • = Current assets - Current liability
      • Current ratio
      • Quick (acid-test) ratio
    • Efficiency Ratios
      • Inventory turnover
      • Average collection period (Days sales outstanding)
      • Assets Turnover
      • Fixed assets turnover
    • Leverage Ratios
      • Debt ratio
      • Debt-to-Equity ratio
      • Times interest earned ratio
    • Profitability Ratios
      • Gross profit margin
      • Operating profit margin
    • Profitability Ratios
      • Net profit margin
      • Return on total assets (ROA)
      • Return on equity (ROE)
    • Du Pont System of Analysis
      • Used by financial managers as a structure to dissect the firm's financial statements and to assess its financial condition.
      • ROA =
      • = (net profit margin) x (assets turnover)
      • ROE =
      • = (net profit margin) x (assets turnover) x (equity multiplier)
    • Ratios – example
    • Ratios – example continued
      • Calculate the following ratios:
      • Current ratio
      • Days sales outstanding
      • Inventory turnover
    • Ratios – example continued
      • Total assets turnover
      • Profit margin on sales
    • Ratios – example continued
      • Return on Assets
      OR
    • Ratios – example continued
      • Return on Equity
      OR
    • Ratios – example continued
      • Debt ratio
    • Example - results