Financial ratio

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Financial ratio

  1. 1. EVALUATING A FIRM’S FINANCIAL PERFORMANCE Financial Ratio Analysis
  2. 2. Liquidity • The liquidity of the firm is measured by its ability to satisfy its short-term obligations as they come due. • Liquidity refers to the solvency of the firm’s overall financial position – the ease with which it can pay bills. • HOW LIQUID IS THE FIRM – Can we pay the bills?
  3. 3. LIQUIDITY RATIO • Current Ratio • Quick Ratio or Acid Test
  4. 4. Activity • Measure the speed with which various accounts are converted into sales or cash – Inflow or outflows. • Need to asses the activity (liquidity) of specific current accounts • Inventory, Accounts Receivable and Accounts Payable
  5. 5. Activity Ratio • Inventory Turn-over • Average Collection Period • Average Payment Period • Total Asset Turn-over
  6. 6. Debt Position • The debt position of a firm indicates the amount of other people’s money being used to generate profits. • The more debt a firm uses in relation to its total assets the greater its financial leverage. • Financial Leverage – is the magnification of risk and return introduced through he use of fixed cost financing such as debt and preferred stock.
  7. 7. Debt Position • Debt Ratio
  8. 8. Profitability • These measures enable the analyst to evaluate the firm’s profits with respect to a given level of sales, certain level of assets , or the owners investment. • Without profits, a firm could not attract outside capital. Owners , creditors and management pay close attention to boosting profits because of its great importance in the marketplace.
  9. 9. PROFITABILITY RATIO RATIO DEFINITION FORMULA GROSS PROFIT MARGIN Measures the percentage of each peso sales remaining after the firm has paid its goods. The higher the GPM, he better. (Lower the relative cost of merchandise sold) GPM = SALES – COGS/ SALES GPM = GP / SALES NET PROFIT MARGIN Measures the percentage of each peso sales remaining after all cost, expenses including taxes, interest and preferred stock have been deducted. ( Higher the better) NPM = Earnings available to common stockholders/ sales OPERATING PROFIT MARGIN Measures the percentage of each peso sales remaining after all cost and expenses other than interest, taxes and PSD are deducted. The are called pure profits . The higher the better. OPM = Operating Profits/Sales EARNINGS PER SHARE Number of Peso earned during the period on behalf of each outstanding share of common stock. EPS = Net Income / Number of Shares of common stock outstanding
  10. 10. PROFITABILITY RATIO RATIO DEFINITION FORMULA RETURN ON TOTAL ASSETS (ROI) Measures the overall effectiveness of management in generating profits with its available asset. Return on Total Assets = Earnings avail for Common Stockholders/ Total Assets RETURN ON COMMON EQUITY (ROE) Measures the return earned on the common stockholders investment of the firm. ROE = EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS/COMMO N STOCK EQUITY
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