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Why Financial Ratio Analysis?
The document discusses financial ratio analysis and its importance in comparing company performance, particularly between Facebook and Google. It covers various financial metrics such as profitability, efficiency, liquidity, and financial gearing, along with how to calculate these ratios effectively. The document also emphasizes the significance of these ratios for different stakeholders like investors, lenders, and competitors to assess a company's financial health and operational efficiency.
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Why Financial Ratio Analysis?
- 1. Why Financial RatioAnalysis?
- 2. Can we compareFB and Google in terms of performance? Efficiency?
- 3. Compare data ofsame business → over the period/past vs present Compare data of a business with the similar business
- 4. Growth LT stability Achieve sus Survival Satisfaction Maxprofit/sales/ROI
- 5. Who are interestedwhat? Profit? Liquidity Efficiency? Gearing? Investing? Short-term lenders Long-term lenders Financial analysts Investors Government Competitors Employees
- 6.
- 7. How to calculatea ratio?: G rules Ratios calculation 1 2 1 1 If BL involves: 1 2+ 1 1 or And/or Use avr figure
- 8. Profitability? Gross profit margin Netprofit margin ROA ROE ROCE ? ? ? ?
- 9. Interpretations on Profitability ↑↓Grossprofit margin??? ? ? ↑↓ Net profit margin??? ?
- 10. ↑↓Gross profit margin??? ↑↓ Netprofit margin??? ↓↑ ↓↑ ↓↑ Sales vol/price Production cost Purchase cost Staff/opt cost Admin/ad/….. If gross profit margin is the same…. Interpretations on Profitability Market Mx These ratios: useful for comparing the company performance over a number of years
- 11. ROA ROCE ROE % Profit returnedon the amount invested Effectiveness & efficiency of resources deployment Useful for comparing 2 or more companies Or Performance over years Interpretations on Profitability
- 12. Efficiency? BS 1 BS2Avr turnover + = X 365 Credit purchase Avr Inv turnover 2 Avr AR turnover Avr AP turnover X 365 X 365 COGS COGS X 365Avr TA turnover Sales
- 13. Interpretations on efficiency Cashsales + ↑↓ Credit sales ↑↓ Debtor collection period ↑↓ working capital ↑↓ Inventory stock ↑↓ Inventory held period ↑↓ working capital Cost of warehouse Obsolescence ↑↓ Credit purchase ↑↓ Credit payment period ↑↓ suppliers’ goodwill Performance efficiency
- 14. Interpretations on efficiency X365Avr TA turnover Sales TA Age conditions valuation recently rent or purchase
- 15. Liquidity? Current asset Current liabilities (Currentasset)-(Inv+Prepaid) Current liabilities Opt cash-flow Current liabilities Current ratio Acid test ratio Cash-Flow from operating ratio
- 16. Interpretations on liquidity Howquickly settle the debt? Higher the ratio → more liquidHigh liquidity Current asset Current liabilities Very high ratio means… ↑↑↑Cash or Inv or AR??? Can inv/AR be converted readily? (Current asset)-(Inv+Prepaid) Current liabilities High liquidity Cash/cash equivalent BS = snapshot Manipulation risk to ↑?? Exercise pg 310
- 17. Financial Gearing? Interest b/4tax Interest b/4 tax Tax Tax Profit after tax Profit after tax Dividend Dividend > < < < ROE ROE> Exercise pg 311
- 18. Financial Gearing? LT liabilities (LTliabilities+ Share Cap + Reserve) Gearing ratio EBIT Interest expense Interest coverage ratio
- 19. Total Liabilities *100 Total Equity Total Liabilities * 100 Total assets Total equity * 100 Total assets Debt to equity ratio Debt ratio Equity ratio Financial Gearing?
- 20. Interpretations on financialgearing? ↑ gearing → ↑ risk LT liabilities (LT liabilities+ Share Cap + Reserve) Gearing ratio Company’s commitment to LT lenders against LT liabilities EBIT Interest expense Interest coverage ratio How much EBIT cover its interest payment
- 21. Investment ratios? Net profitfrom Income statement (earning) Reinvestment Dividend DVD per share = DVD/share issued DVD payout = DVD/earning Earning per share = earning/share issued
- 22.
- 23. Investment ratios? if Ibuy a share of Appl, how much dvd will I earn? How much market is confident on Appl earning power? (Before I buy, I want to know) How do I know the ability of Appl to pay dvd? (Before I buy, I want to know) DVD /share * 100 MP/share MP /share * 100 Earning/share Opt cash flow – pf share * 100 ordinary share issues DVD yield P/E ratio Opt cash flow/share Exercise pg 321