Formulae and Ratio Analysis
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Formulae and Ratio Analysis

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    Formulae and Ratio Analysis Formulae and Ratio Analysis Presentation Transcript

    • Formulae and Ratio Analysis
      Jr Vi, Lilia Karimi, MeghVakaria, Kyle Petty, Linh Le and Jordan Alfaro
    • Profitability Ratios
    • Profitability RatiosGross Profit Margin
      • Result of:
      • Price structure
      • Amount of business done
      • How well expenses are controlled
      • Return after variable cost are taken from the sales revenue
      • Can be compared to industry standards
    • Profitability RatiosGross Profit Margin
      • Example
    • Profitability RatiosNet Profit Margin
      • The profit left after all the cost have been taken from the sales revenue
    • Liquidity Ratios
    • Liquidity Ratios
      Ability to meet its near-term obligations, and it is a major measure of financial health
      Liquidity= cash that is within a business/ability to generate cash quickly
      The higher value the ratio is, the larger the margin of safety the business has to pay off debts
    • Liquidity Ratios
      Creditors are the people interested in the ratio because it shows if you can pay off your business
      If you're looking to secure money via the sale of some stock through an initial public offering, many State Securities Bureaus will require that you have a current ratio of 2:1 or better.
    • Liquidity RatiosCurrent Ratio
      It signifies a company's ability to meet its short-term liabilities with its short-term assets
      Current Ratio= Current Assets/ Current Liabilities
      $48 Million/ $34 Million= 1.4 Times
      Current assets includes cash, marketable securities, accounts receivable, prepaid expenses and inventories.
      Current liabilities include accounts payable, current maturity of long term debt and accrued income taxes.
    • Liquidity RatiosAcid Test (Quick) Ratio
      Refined version of current ratio
      It eliminates certain current assets such as inventory and prepaid expenses that may be more difficult to convert to cash.
      Example:
      $48 Million- $10 Million/ $34 Million = 1.1 Times
      In general, a quick or acid-test ratio of at least 1:1 is good. That signals that your quick current assets can cover your current liabilities.
    • Efficiency Ratios
    • Efficiency RatiosReturn on Capital Employed (ROCE)
      The “primary ratio”
      Tells how effective the business is at returning a profit from the capital it has
      Can compare small businesses to big businesses
      Shareholders – compare ROCE with other investments
      Should be higher for more risk as a good investment
    • Efficiency RatiosStock Turnover
      Low ratio = poor sales and therefore excessive inventory
      High ratio = strong sales or effective buying.
    • Efficiency RatiosStock Turnover (Number of Days)
      Calculates the days it takes to sell the stock and how many days’ worth of stock is held by the business
    • Gearing Ratio
    • Gearing Ratio
      • Looks at the promotion of capital employed that comes from long-term loans.
      • Companies borrow money
      • Expand
      • New machinery and equipment
      • More capital = more interest pay
      • Borrowing is a risk
      • Assess how big that risk is
      • Measures proportion of company's total capital borrowed
    • Gearing Ratio
      Example 1
      Company A: gearing 75%
      Profit $100 million
      Interest $50 million
      Cover interest payments twice over.
      Example 2
      Company B: gearing 35%
      Profit $20 million
      Interest $18 million
      Just about cover interest payments.
    • Investment Appraisal
    • Investment Appraisal Average Rate of Return (ARR)
      Used in investment appraisal
      Measures profitability/accounting of a project of its life
      Considers all data, not just cash flows up the point of payback
    • Investment Appraisal Average Rate of Return (ARR)
      Example:
      “Stilgitz Instruments AG is considering buying a new calibrating machine for €200,000. The extra costs and revenues over its useful life are shown in Table 1.0.”
    • Investment Appraisal Average Rate of Return (ARR)