Liquidity Ratios : The liquidity of the firm measured by it’s ability to satisfy it’s short term obligation and it represent financial position in other word can Company pay it’s bills Current Ratio: (%) C/R = Current assets Current Liabilities The higher C/R , The more liquid the firm ( Higher – Better )
Cont. Liquidity Ratio in Personal Finance Individuals like Corporation can use financial Ratio to analysis Example : Ahmed el Hosiny s’ total liquid assets 2225 L.E and he has total current debts 21539 L.E ( Loan – Mortgage payment – Car loan ) C/R = 2225 = 0.1033 * 100% = 10.3% 21539
Cont. Liquidity Ratios : Quick Ratio : Quick Ratio like similar to current Ratio except it’s excludes Inventory ( It low liquidity – can’t sold easily – Inventory in common sold in Credit ) Quick Ratio = Current assets – Inv. Current liabilities Which Better C/R - Quick Ratio ?
Activity Ratio 1) Inventory Turnover : Measures activity , liquidity of firm’s inventory which means Measures the speed of converting inventory into sales. Inventory Turnover = Cost of Goods sold ( COGS ) Inventory If inventory turnover=2, this means that the firm changes inventory 2 times a year
Average payment period :It means average age of accounts payableAPP= AP Average purchase per day = AP annual purchase/360 If APP is 50, it takes the firm 50 days to pay an AP.
2) Average Collection Period :Is useful in evaluating credit and collection PoliciesAverage Collection period = Account Receivable Annual Sales / 360 days
Very Important Note: ACP Should be Less than APP
It indicates the efficiency with which the firm uses its assets to generate sales. Total assets turnover= sales total assets If total assets turnover is 0.5, the firm turns over its assets 0.5 times a year or (every $1 invested in assets generate $0.5) The higher this ratio ,the more efficient the firm’ s assets have been used .
The higher the portion of borrowed funds to owner-contributed funds, the greater the assumed risk to lenders.
Debt equity ratio:Indicates how well the shareholders’ investment in the company provides cushion for assets shrinkage.Measures how much the shareholders have a risk (capital structure).Debt to equity ratio = total liabilities total assets
Times Interest Earned Ratio:sometimes called the interest coverage ratio,Measures the firm’s ability to make contractual interest payments. The higher its value, the better able the firm is to fulfill its interest obligations.Times Interest Earned Ratio= Earnings before interest and taxes Interest expense
Measures the company’s ability to sell its products or provide a service at a price that exceeds its expenses.
Gross Profit Margin (%) It measures the percentage of each sales dollar remaining after the firm has paid for its goods. GPM = Sales – cost of goods sold sales. = Gross Profit sales. A higher GPM , better
Operating Profit Margin (%) It measures the percentage of each sales dollar remaining after all costs and expenses other than interest, taxes, and preferred stock dividends are deducted. OPM=Operating Profits (EBIT) sales A higher OPM , better
Net Profit Margin It measures the percentage of each sales dollar remaining after all costs and expenses including interest, taxes, and PS dividends are deducted. NPM= earnings available to CS sales A higher NPM , better
Earning per share It represents the number of dollars earned during the period on behalf outstanding shares of CS. EPS= earnings available to CS number of shares of CS outstanding. A high EPS , better
Return on total assets (ROA) It measures the overall effectiveness of the firm in generating profits from available assets. It’s called return on investment. ROA= earnings available to CS total assets If ROA is 7% this means that the firm earns 7 cents on each dollar invested in total assets during the past years.
Return on common equity (ROE) It measures the return earned on the common stockholder’s investment in the firm. ROE=earnings available to CS common stock equity. If ROE is 12% this means that the firm earns 12 cents on each dollar in common stock equity during the past year. A high ROE , better.
Objective: Game Cont. Getting into the vault without your faces being detected by any security camera What you have: 5 Socks A Spoon A DODGE RAM vehicle Electric Shocker 3 Suits A mobile phone What they have: Guards with guns (the blue dots) Metal Detector on front entrance Vault that only opens with the eye scan of the manager