Ratio analysis

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Ratio analysis

  1. 1. The Analysis ofFinancial Statements
  2. 2. THE USE OF FINANCIAL RATOS Ratio Analysis involves methods of calculating and interpreting financial ratios inorder to assess a firms performance and status Financial Ratio are used as a relative measure, that facilitates the evaluation ofefficiency orcondition of a particular aspect of a firms operations
  3. 3. IMPORTANCE OF RATIOS ANALYSING FINANCIAL STATEMENTS SIMPLIFYING ACCOUNTING FIGURES HELPFUL IN FUTURE FORECASTING MEASURING THE PROFITABILIY TREND ANALYSIS
  4. 4. LIMITATIONS OF RATIOS FALSE RESULTS LIMITED USE OF SINGLE RATIO IGNORING QUALITATIVE FACTORS
  5. 5. Financial Statements Balance Sheet‡ Income Statement‡ Cashflow Statement‡ Statement of Retained Earnings
  6. 6. Interested Parties Three sets of parties are interested in ratio analysis: Share holders Creditors Management
  7. 7. Groups of Financial Ratios Liquidity Activity Debt Profitability
  8. 8. Analyzing Liquidity Liquidity refers to the solvency of the firms overall financial position,i.e. a"liquid firm" is one that can easily meet its short-term obligations as they come due. A second meaning includes the concept of converting an asset into cash with little or no loss in value
  9. 9. Three liquidity measuresNet Working Capital(NWC)N W C = Current Assets -Current LiabilitiesCurrent Ratio (CR ) =Current Assets Current LiabilitiesQuick (Acid-Test)Ratio(QR ) = Current Assets -Inventory Current Liabilities
  10. 10. Analyzing ActivityActivity is a more sophisticated analysis ofa firms liquidity, evaluating the speed withwhich certain accounts are converted in tosales or cash;also measures a firms efficiency
  11. 11. Five important Activity MeasureInventoryTurnover IT = Cost of Goods Sold InventoryAverage Collection AccountsReceivablePeriod(ACP) Annual Sales/360 Accounts PayableAverage PaymentPeriod = Annual Purchases/360(APP)
  12. 12. Fixed AssetTurnover Sales(FAT) Net Fixed AssetsT otalAssetTurnover Sales(TAT) Total Assets
  13. 13. Analyzing DebtDebt is a true "double-edged" sword as it allows for thegeneration of profits with the use of other peoples(creditors) money, but creates claims on earnings with ahigher priority than those of the firms owners.Financial Leverage is a term used to describe themagnification of risk and return resulting from the use offixed-cost financing such as debt and preferred stock
  14. 14. Measures of DebtThere are Two General Types of Debt Measures - Degree of Indebtedness -Ability to Service Debts
  15. 15. Debt Ratio(DR ) = Total Liabilities Total Assets Debt-Equity = Long-Term Debt Ratio Stockholders· Equity (DER )
  16. 16. Profitability MeasuresProfitability Measures assess the firms abilityto operate efficiently and are of concernto,owners,creditors,and management
  17. 17. Gross Profit Margin = gross profit salesNet profir margin = net profit salesOperating profit = operating profitMargin sales
  18. 18. Return on = profit after tax Total assets total assetsReturn on = net profit after taxesEquity stockholder’s equity
  19. 19. EPS = Earning available for common stock holders outstanding equity shares PE Ratio = mkt price / share EPS

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