This document discusses ratio analysis and different types of financial ratios used to analyze a company's performance and financial health. It covers liquidity ratios, capital structure ratios, asset management (turnover) ratios, profitability ratios, and market value ratios. Key categories of ratios include liquidity, capital structure, asset management, profitability, and market value. Ratios are useful when compared over time or against peer companies to benchmark performance.

1. Ratio Analysis
• Financial ratios are relationships determined from
a firm’s financial information.
• Used to compare and investigate relationships
between different pieces of financial information,
either over time or between companies.
• Ratios eliminate the size problem.

2. Categories of Financial Ratios
• Liquidity—measures the firm’s short-term solvency.
• Capital structure—measures the firm’s ability to
meet long-run obligations (financial leverage).
• Asset management (turnover)—measures the
efficiency of asset usage to generate sales.
• Profitability—measures the firm’s ability to control
expenses.
• Market value—per-share ratios.

3. Liquidity Ratios
overdraftBanksliabilitieCurrent
InventoryassetsCurrent
ratioQuick
sliabilitieCurrent
assetsCurrent
ratioCurrent





4. Capital Structure Ratios
onamortisationdepreciatiafter taxprofitNet
debtbearing-Interest
flowcashgrossDebt to
chargesfinanceInterest
EBIT
coverinterestNet
equityTotal
assetsTotal
multiplierEquity
equityTotal
debtTotal
ratioyDebt/equit
sIntangibleequityTotal
CashdebtfinancialTotal
ratioydebt/equitNet










5. Turnover Ratios
receivableAccounts
Sales
turnoversReceivable
turnoverInventory
days365
inventoryinsalesDays'
Inventory
soldgoodsofCost
turnoverInventory




6. Turnover Ratios (continued)
assetsTotal
Sales
overasset turnTotal
assetscurrent-Non
Sales
overasset turnFixed
turnoversReceivable
days365
sreceivableinsalesDays'




7. Profitability Ratios
%100
equityTotal
profitNet
(ROE)equityonReturn
%100
assetsTotal
EBIT
investmentonReturn
100%
assetsTotal
profitNet
(ROA)assetsonReturn
Sales
profitNet
marginProfit





8. Market Value Ratios
shareperBook value
shareperueMarket val
ratiobook-to-Market
shareperEarnings
shareperPrice
ratioingPrice/earn



9. The Du Pont Identity
• Breaks ROE into three parts:
– operating efficiency
– asset use efficiency
– financial leverage
multiplierEquityROA
multiplierEquityoverasset turnTotalmarginProfit
Equity
Assets
Assets
Sales
Sales
profitNet
ROE




10. Uses for Financial Statement
Information
• Internal uses:
– performance evaluation
– planning for the future
• External uses:
– evaluation by outside parties
– evaluation of main competitors
– identifying potential takeover targets

11. Benchmarks for Comparison
• Ratios are most useful when compared to a
benchmark.
• Time-trend analysis—examine how a particular
ratio(s) has performed historically.
• Peer group analysis—using similar firms
(competitors) for comparison of results.
• Global Industry Classification Standard (GICS)
used by ASX is a useful way to find a peer
company.

12. Problems with Ratio Analysis
• No underlying theory to identify correct ratios to
use or appropriate benchmarks.
• Benchmarking is difficult for diversified firms.
• Firms may use different accounting procedures.
• Firms may have different recording periods.
• One-off events can severely affect financial
performance.