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1、Classes of Ratios Liquidity Current Quick Efficiency Receivables turnover Inventory turnover Payables turnover Fixed asset turnover Debt/equity Profitability Interest coverage Fixed charge coverage Net profit margin ROA ROE Valuation Price/Earnings Market/BookDupont TheoryROE =Net IncomeSalesAssets_
2、SalesAssetsEquityKEY FINANCIAL RATIOS Profitability Efficiency Leverage LiquidityKEY FINANCIAL RATIOS . . . PROFITABILITYRatioCalculationDefinitionAnalysisOperating Profit Margin(Operating Profit/Net Sales) X 100Represents the percentage of profits retained from each sales dollarRatio should remain
3、stable or increase over timeUnderstanding of any changes requires a detailed breakdown of operating expensesNet Profit Margin(Net Profit/Net Sales) X 100Measures the ability of the business to generate profit from each sales dollarIn general, this ratio should move in the same direction as the gross
4、 and operating profit marginsVariances require a closer look at non-operating expenses, e.g., interest expensesDirect Cost & Expense Ratios(Cost of Goods Sold/Net Sales) X 100Indicates the percentage of each sales dollar used to fund the expensesUpward trends in any of these ratios may indicate reas
5、ons for declining profitabilityDownward trends may indicate good cost controlKEY FINANCIAL RATIOS . . . EFFICIENCYDefinition of Efficiency: Effectiveness of a companys management in managing its resources and activities.RatioCalculationDefinitionAnalysisInventory Days on Hand(Inventory/Cost of Goods
6、 Sold) X 360 DaysIndicates managements ability to efficiently manage inventoryLow ratio is goodA large increase may indicate a deliberate management decision to make bulk pur-chases in anticipation of a possible supply disruptionInterpretation: Division of the inventory turnover ratio into 365 days
7、yields the average length of time units are in inventory.RatioCalculationDefinitionAnalysisAccounts Receivable Days on Hand(Net Accounts Receivable/Net Sales) X 360 DaysIndicates managements ability to collect its receivablesCritical to cash flowAnalyze receivable aging schedule and receivable conce
8、ntrationsPoor receivable quality can significantly increase this ratio and greatly impact cash flowInterpretation: This figure expresses the average time in days that receivables are outstanding. Generally, the greater number of days outstanding, the greater the probability of delinquencies in accou
9、nts receivable. A comparison of a companys daily receivables may indicate the extent of a companys control over credit and collections. The terms offered by a company to its customer, however, may differ from terms within the industry and should be taken into consideration.KEY FINANCIAL RATIOS . . .
10、 EFFICIENCY (Cont.)RatioCalculationDefinitionAnalysisAccounts Payable Days on Hand(Accounts Payable/Cost of Goods Sold) X 360 DaysMeasures financing provided by trade creditors to company and managements paying habitsIncreasing days on hand may indicate cash flow problemsIn general, a firm with cash
11、 flow problems relies more on its trade creditorsIf A/R days increase significantly, it may indicate a short-term solution to cash flow problemsReturn on Assets (ROA)Net profit After Taxes/ Total AssetsMeasures return on investment represented by the assets of the businessAnalyze as net profit gener
12、ated by management based upon utilizing the total business assetsReturn on EquityNet Profit/Tangible Net WorthMeasures rate of return on owners equityThis measures managements ability to operate a profitable businessIf the return is good, the company should be able to generate additional equityInter
13、pretation: This ratio measures the number of times accounts and notes payable (trade) turn over during the year. The higher the turnover of payables, the shorter the time between purchase and payment. If a companys payables appear to be turning more slowly than the industry, then the company may be
14、experiencing cash shortages, disputing invoices with suppliers, enjoying extended terms, or deliberately expanding its trade credit. The ratio comparison of company to industry suggests the existence of these possible causes or others. If a firm buys on 30-day terms, it is reasonable to expect this
15、ratio to turn over in approximately 30 days. A problem with this ratio is that it compares one days payables to cost of goods sold and does not take seasonal fluctuations into account.KEY FINANCIAL RATIOS . . . LEVERAGEDefinition of Leverage: Compares the funds supplied by business owners with financing supplied by creditors. Measures debt capacity and ability to meet obligations.RatioCalculationDefinitionAnalysisDebts to AssetsTotal Liabilities/Total Ass
