Formulae and Ratio Analysis


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Formulae and Ratio Analysis

  1. 1. Formulae and Ratio Analysis<br />Jr Vi, Lilia Karimi, MeghVakaria, Kyle Petty, Linh Le and Jordan Alfaro <br />
  2. 2. Profitability Ratios<br />
  3. 3. Profitability RatiosGross Profit Margin<br /><ul><li> Result of:
  4. 4. Price structure
  5. 5. Amount of business done
  6. 6. How well expenses are controlled
  7. 7. Return after variable cost are taken from the sales revenue
  8. 8. Can be compared to industry standards</li></li></ul><li>Profitability RatiosGross Profit Margin<br /><ul><li>Example</li></li></ul><li>Profitability RatiosNet Profit Margin<br /><ul><li>The profit left after all the cost have been taken from the sales revenue </li></li></ul><li>Liquidity Ratios<br />
  9. 9. Liquidity Ratios<br />Ability to meet its near-term obligations, and it is a major measure of financial health<br />Liquidity= cash that is within a business/ability to generate cash quickly <br />The higher value the ratio is, the larger the margin of safety the business has to pay off debts<br />
  10. 10. Liquidity Ratios<br />Creditors are the people interested in the ratio because it shows if you can pay off your business<br />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.<br />
  11. 11. Liquidity RatiosCurrent Ratio<br />It signifies a company's ability to meet its short-term liabilities with its short-term assets<br />Current Ratio= Current Assets/ Current Liabilities<br /> $48 Million/ $34 Million= 1.4 Times<br />Current assets includes cash, marketable securities, accounts receivable, prepaid expenses and inventories.<br />Current liabilities include accounts payable, current maturity of long term debt and accrued income taxes.<br />
  12. 12. Liquidity RatiosAcid Test (Quick) Ratio<br />Refined version of current ratio<br />It eliminates certain current assets such as inventory and prepaid expenses that may be more difficult to convert to cash.<br />Example:<br />$48 Million- $10 Million/ $34 Million = 1.1 Times<br />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.<br />
  13. 13. Efficiency Ratios<br />
  14. 14. Efficiency RatiosReturn on Capital Employed (ROCE)<br />The “primary ratio” <br />Tells how effective the business is at returning a profit from the capital it has<br />Can compare small businesses to big businesses <br />Shareholders – compare ROCE with other investments <br />Should be higher for more risk as a good investment<br />
  15. 15. Efficiency RatiosStock Turnover<br />Low ratio = poor sales and therefore excessive inventory<br />High ratio = strong sales or effective buying. <br />
  16. 16. Efficiency RatiosStock Turnover (Number of Days)<br />Calculates the days it takes to sell the stock and how many days’ worth of stock is held by the business<br />
  17. 17. Gearing Ratio <br />
  18. 18. Gearing Ratio<br /><ul><li>Looks at the promotion of capital employed that comes from long-term loans.
  19. 19. Companies borrow money
  20. 20. Expand
  21. 21. New machinery and equipment
  22. 22. More capital = more interest pay
  23. 23. Borrowing is a risk
  24. 24. Assess how big that risk is
  25. 25. Measures proportion of company's total capital borrowed</li></li></ul><li>Gearing Ratio<br />Example 1<br />Company A: gearing 75%<br />Profit $100 million<br />Interest $50 million<br />Cover interest payments twice over.<br />Example 2 <br />Company B: gearing 35%<br />Profit $20 million<br />Interest $18 million<br />Just about cover interest payments.<br />
  26. 26. Investment Appraisal <br />
  27. 27. Investment Appraisal Average Rate of Return (ARR)<br />Used in investment appraisal <br />Measures profitability/accounting of a project of its life <br />Considers all data, not just cash flows up the point of payback<br />
  28. 28. Investment Appraisal Average Rate of Return (ARR)<br />Example:<br />“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.”<br />
  29. 29. Investment Appraisal Average Rate of Return (ARR)<br /> <br />