1
Ratios and Financial Analysis
Chapter 4
2
Ratios and Financial Analysis
Ratios : Why
» Comparability among firms of different sizes
» Provides a profile of the fi...
3
Negative numbers
Firm Payout Ratios Dividend Income
A $1,000 $5,000
20.00%
B $1,000 $3,000
33.33%
C $1,000 $(5,000)
-20....
4
Common Size Statements
All figures divided by the same figure
Balance Sheet: Divide by
Total Assets = Liabilities + Equi...
5
1 Activity Analysis
An Income Statement ÷ A Balance Sheet Figure
Inventory Turnover = Cost of Goods Sold
÷ Average Inven...
6
2 Liquidity Analysis
Cash Cycle= Days Inventory Outstanding
+ Days Receivables Outstanding
- Days Payable Outstanding
−−...
7
3 Long term Debt and Solvency Analysis
Important for Bond Covenants
Debt = Short-term debt + Long-term debt
Total capita...
8
Balance Sheet - reported
Assets
Equity
Long-term debt
Short-term debt
Long-term Payables
e.g. retirement benefits,
Defer...
9
Balance Sheet - rearrange
Assets
Equity
Long-term debt
Short-term debt
Long-term Payables
e.g: retirement benefits
Defer...
10
Balance Sheet
Assets
Operating Liabilities
Debt
Equity
0
Int. Exp •
(1-t)
Net
Income
Cost/return
11
Returns
Operating Liabilities
Debt
Equity
0
Int. Exp •
(1-t)
Net
Income
Cost/return
After tax
Interest Rate
ROE
÷
÷
=
=
12
4-1 Profitability Analysis
Gross Margin =
Margin Before
Interest & Taxes =
Asset Turnover =
Return on Assets =
Sales
As...
13
4–2 Profitability Analysis
Return on =
Total capital
(ROTC)
=
Net Income = (EBIT – Interest Expense) (1 – tax)
Return o...
14
Ratios – Integrated Analysis
Economic relationships:
higher sales leads to higher inventories
Overlap of components:
As...
15
Ratios as composite of other ratios
Page 148
16
Returns
Operating Liabilities
Debt + Equity
=
Total Capital
0
Int. Exp •
(1-t)
+
Net
Income
Cost/return
ROTC÷ =
17
ROE from ROTC
18
ROTC from ROA
19
4-12 : ROE and ROA (Book)
Net Income
ROE =
Equity
NI + (1-t) Interest Exp (1-t) Interest Exp
= -
Equity Equity
NI + (1-...
20
Total leverage Components
Operating Leverage • Financial Leverage
Contribution Margin After Tax NOPAT
= •
NOPAT Net Inc...
21
M1: ROE from ROA
22
Total leverage
Total Leverage
Change in Net Income Revenue
= •
Net Income Change in Revenue
Change in units x CM per un...
Upcoming SlideShare
Loading in …5
×

Ratios and financial analysis

573 views

Published on

Ratios and financial analysis for management students of any university.

Published in: Economy & Finance
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
573
On SlideShare
0
From Embeds
0
Number of Embeds
94
Actions
Shares
0
Downloads
47
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Ratios and financial analysis

  1. 1. 1 Ratios and Financial Analysis Chapter 4
  2. 2. 2 Ratios and Financial Analysis Ratios : Why » Comparability among firms of different sizes » Provides a profile of the firm Caution: » Economic assumption of Linearity – Proportionality » Nonlinearity can cause problems: » Fixed costs, EOQ for inventories Benchmarks: Is high Current ratio good? For whom? Industry-wide norms. Accounting Methods; Timing & Window Dressing Current ratio: 300/200 to 200/100 is it getting better?
  3. 3. 3 Negative numbers Firm Payout Ratios Dividend Income A $1,000 $5,000 20.00% B $1,000 $3,000 33.33% C $1,000 $(5,000) -20.00% Who has the highest payout ratio ? NOT B
  4. 4. 4 Common Size Statements All figures divided by the same figure Balance Sheet: Divide by Total Assets = Liabilities + Equity Income Statement: Divide by Revenue Analysis across statements (activity analysis) not possible. i.e. can not divide a Income Statement by Balance Sheet number Industry Comparison [Robert Morris Associates] Yahoo Finance
  5. 5. 5 1 Activity Analysis An Income Statement ÷ A Balance Sheet Figure Inventory Turnover = Cost of Goods Sold ÷ Average Inventory Receivables Turnover = Sales ÷ Average Receivables Fixed Asset Turnover = Sales ÷ Average Fixed Assets Asset Turnover = Sales ÷ Average Total Assets [365 / Turnover] is days outstanding. More Turnover is it always good / bad Payables Turnover = Purchases ÷ Average Payables
  6. 6. 6 2 Liquidity Analysis Cash Cycle= Days Inventory Outstanding + Days Receivables Outstanding - Days Payable Outstanding −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−− Current Ratio = Quick Ratio = Cash + Marketable Securities + Accounts receivable ÷ Current Liabilities Cash flow from= Cash flow from operations operations ratio ÷ Current Liabilities −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−− Dell: 2004 10-K Look at pages 22 and 31
  7. 7. 7 3 Long term Debt and Solvency Analysis Important for Bond Covenants Debt = Short-term debt + Long-term debt Total capital = Debt + Equity Debt to Equity = Times Interest Earned = Debt Debt to total capital = Total capital Total Assets Leverage = Equity
  8. 8. 8 Balance Sheet - reported Assets Equity Long-term debt Short-term debt Long-term Payables e.g. retirement benefits, Deferred taxes Short-term Payables
  9. 9. 9 Balance Sheet - rearrange Assets Equity Long-term debt Short-term debt Long-term Payables e.g: retirement benefits Deferred taxes Short-term Payables Interest Paid No Interest Paid
  10. 10. 10 Balance Sheet Assets Operating Liabilities Debt Equity 0 Int. Exp • (1-t) Net Income Cost/return
  11. 11. 11 Returns Operating Liabilities Debt Equity 0 Int. Exp • (1-t) Net Income Cost/return After tax Interest Rate ROE ÷ ÷ = =
  12. 12. 12 4-1 Profitability Analysis Gross Margin = Margin Before Interest & Taxes = Asset Turnover = Return on Assets = Sales Assets EBIT Sales Gross Profit Sales NI + (1-tax) Int Exp Assets
  13. 13. 13 4–2 Profitability Analysis Return on = Total capital (ROTC) = Net Income = (EBIT – Interest Expense) (1 – tax) Return on Equity = Debt = average Debt; Equity = Average Equity
  14. 14. 14 Ratios – Integrated Analysis Economic relationships: higher sales leads to higher inventories Overlap of components: Asset TO ratio is related to individual TO ratios.
  15. 15. 15 Ratios as composite of other ratios Page 148
  16. 16. 16 Returns Operating Liabilities Debt + Equity = Total Capital 0 Int. Exp • (1-t) + Net Income Cost/return ROTC÷ =
  17. 17. 17 ROE from ROTC
  18. 18. 18 ROTC from ROA
  19. 19. 19 4-12 : ROE and ROA (Book) Net Income ROE = Equity NI + (1-t) Interest Exp (1-t) Interest Exp = - Equity Equity NI + (1-t) Interest Exp Assets = • Assets Equity (1-t) Interest Exp Assets - • Assets Equity (1-t) Interest Exp = ROA - Asset       Assets :page 142 last s Equity [also in 4-12]
  20. 20. 20 Total leverage Components Operating Leverage • Financial Leverage Contribution Margin After Tax NOPAT = • NOPAT Net Income Contribution Margin After Tax = Net Income
  21. 21. 21 M1: ROE from ROA
  22. 22. 22 Total leverage Total Leverage Change in Net Income Revenue = • Net Income Change in Revenue Change in units x CM per unit x (1 - Tax rate) = Net Income Units x Unit price • Change in Units X Unit Price Units x CM per unit x = (1 - Tax rate) Net Income Contribution Margin After Tax Net Income =

×