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1、Author CollinsQian RatioAnalysis March1998 Agenda UsingratiosTypesofkeyratiosprofitabilityturnoverleverageliquiditycoverageReturnonEquityRatioexercisesForecastingexerciseAbbreviationsKeytakeaways AnalyzingRatios Ratiosinisolationaremeaningless Acompany sratiosmustbeexaminedovertimeand oragainstitsco
2、mpetitors ratios Historicalcomparison Competitivecomparison Comparepresentratioswithsamecompany shistoricalratiosInstablesituations historicalratiosmaybeusedtoprojectfutureperformance Compareacompany sratioswithsimilarfirms ratiosorwithindustryaveragesatthesamepointintime Lookfortrends Lookatrelativ
3、eperformance TheArtofRatioAnalysis Whichratiosaremostimportantinagivensituation Whatitemsshouldbeincluded excludedincalculatingtheratios Howmuchinfluencedoesmanagementhaveovertheratios Whatdotheratiossayaboutthefirm sstrategy Ratioanalysisisanartaswellasascience TheNeedforJudgment PotentialProblem M
4、anagementcansubstantiallyinfluencefinancialsintheshortterm Implications Needtousejudgmenttounderstandfinancials Ratioanalysisrequireskeenjudgment Financialstatementdataishistorical notproforma Cross companycomparisonsaremeaninglessifadjustmentsarenotmadefordifferentaccountingconventions Thetimingoft
5、hereportingperiodinfluencesfundsflowsandrequirements NeedtounderstandthathistorydoesNOTnecessarilypredictfuture Needtobeverysensitiveaboutindustry specificseasonalityandcyclicality Needtostandardizeacrosscompaniestoadjustfordifferentaccountingmethods Agenda UsingratiosTypesofkeyratiosprofitabilitytu
6、rnoverleverageliquiditycoverageReturnonEquityRatioexercisesForecastingexerciseAbbreviationsKeytakeaways TypesofRatios Ratioshelpusunderstandhowwellacompanyisperforming Specifically howmuchreturnisitgeneratingwithwhatlevelofrisk Howwelldoesthecompanymanagecostsrelativetorevenues Return Risk CoverageI
7、nterestchargeFixedchargecoverage LiquidityCurrentratioQuickratio LeverageAssettoequityDebttoequityDebttototalcapital TurnoverReceivablesInventoryPayablesAsset ProfitabilityOperatingmarginROSGrossmargin Howeffectiveisthecompanyinmanagingitsresources Whataretherespectiveclaimsofdebtandequityowners How
8、riskyisthebusiness Isthecompanyabletomeetitsshort termobligations Isthecompanyabletomeetitslong termobligations ProfitabilityRatios Definitions Thisisnotaprofitabilityratio butitdoesimpactROS Profitabilityratiosuselineitemsfromtheincomestatement Ratios Definitions Grossprofitmargin orgrossmargin Sal
9、es costofgoodssoldSales Operatingprofitmargin oroperatingmargin EarningsbeforeinterestandtaxesSales Returnonsales ROS ProfitaftertaxSales Effectivetaxrate TaxesProfitbeforetax ProfitabilityRatios Description Profitability ormargin ratiosareafunctionofboththeindustryandacompany spositionwithintheindu
10、stryboundariesaresetbytheoperatingcharacteristicsoftheindustrywithintheseboundariesprofitabilityratiosaredeterminedbyaplayer srelativepositionBaintypicallyusesgrossprofitandoperatingprofittomeasureprofitabilityROScanbealteredbynon operatingactivities suchassourcesoffinancingortaxratemanipulationsExt
11、raordinaryitems becausetheyareforunusualevents suchasdiscontinueditemsorassetsales areexcludedwhenweanalyzetheperformanceofthebasebusiness Profitabilityratiosmeasureafirm sabilitytomanagecostsrelativetorevenues ProfitabilityRatios OverTime Grossprofitmarginshouldstayconstantorincreasebecausecostofgo
12、odssoldshouldbeaconstantpercentofsalesorshoulddecreaseascompanygetspriceincreasesand orvolumediscountsOperatingmarginshouldincreaseasfixedadministrativeandsalescostsarespreadoveragreaternumberofunitsEffectivetaxrateshouldstayconstantordecreasesincealargerfirmisabletotakeadvantageofmoretaxshelters As
13、acompanygrows itsreturnonsalesshouldincrease Higherreturnonsales ProfitabilityRatios MarketLeader Grossprofitmarginshouldbehighersinceamarketleadercantypicallychargemoreforitsgoodsand orreceivethegreatestvolumediscountsfromsuppliersOperatingprofitmarginshouldbesignificantlyhigher becausehighervolume
14、meansfixedcostsarespreadovermoreunitsandbecausethegrossprofitmarginishigherThereshouldbenosignificantdifferenceintheeffectivetaxrateReturnonsalesshouldbesignificantlyhigherbecausetheoperatingmarginshouldbesignificantlyhigher Themarketleaderinanindustryshouldhavethebestprofitabilityratios Thisisconsi
15、stentwiththeROS RMSconceptwhichsaysthatcompanieswithhighrelativemarketsharehavehighreturnsonsales TurnoverRatios Definitions Note Average YearBeginning YearEnd 2 Salesisoftenagoodproxy Costofgoodssoldisoftenagoodproxy Typicallyweuse365days i e 1year fortheperiod Turnoverratiosuseacombinationofincome
16、statementandbalancesheetitems Ratios Definitions Receivablesturnover Creditsalesinperiod Accountsreceivableaveragebalance Inventoryturnover CostofgoodssoldinperiodAverageinventoryinperiod Payablesturnover Purchasesonaccount Accountspayableaveragebalance Assetturnover SalesinperiodAverageassets Anyturnoverratiocanbeexpressedasaperiodratiowhichmeasuresthenumberofdaysinthecycle Daysinperiod Turnoverratio Periodratio TurnoverRatios TransactionCycle Accountspayable inventory andaccountsreceivablearet