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    Chapter 3 - Outline

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    Ben Yung
    Financial Analysis and ratios What is financial analysis? Evaluating a firm's financial performance Analyzing ratios or numerical calculations Comparing a company to its industry. We will separate 13 significant ratios into four primary categories: 1. Profit Margin. 2. Return on Assets (investment). 3. Return on Equity. D. Debt utilization ratios. 11. Debt to total assets. 12. Times interest earned. 13. Fixed charge coverage.

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    Chapter 3 - Outline

    Uploaded by

    Ben Yung
    44 views7 pages
    Financial Analysis and ratios What is financial analysis? Evaluating a firm's financial performance Analyzing ratios or numerical calculations Comparing a company to its industry. We will separate 13 significant ratios into four primary categories: 1. Profit Margin. 2. Return on Assets (investment). 3. Return on Equity. D. Debt utilization ratios. 11. Debt to total assets. 12. Times interest earned. 13. Fixed charge coverage.

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    Financial Analysis and ratios What is financial analysis? Evaluating a firm's financial performance Analyzing ratios or numerical calculations Comparing a company to its industry. We will separate 13 significant ratios into four primary categories: 1. Profit Margin. 2. Return on Assets (investment). 3. Return on Equity. D. Debt utilization ratios. 11. Debt to total assets. 12. Times interest earned. 13. Fixed charge coverage.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    44 views7 pages

    Chapter 3 - Outline

    Uploaded by

    Ben Yung
    Financial Analysis and ratios What is financial analysis? Evaluating a firm's financial performance Analyzing ratios or numerical calculations Comparing a company to its industry. We will separate 13 significant ratios into four primary categories: 1. Profit Margin. 2. Return on Assets (investment). 3. Return on Equity. D. Debt utilization ratios. 11. Debt to total assets. 12. Times interest earned. 13. Fixed charge coverage.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 7

    Foundations of Financial Management Page 1

    Chapter 3

    Chapter 3 - Outline
    Financial

    LT 3-1

    Financial Analysis

    Analysis 4 Categories of Financial Ratios Importance of Ratios Inflation and its Impact on Profits

    McGraw-Hill/Irwin

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Financial Analysis and Ratios


    What is financial analysis?
    Evaluating

    LT 3-2

    4 Categories of Ratios
    Profitability

    LT 3-3

    a firms financial performance Analyzing ratios or numerical calculations Comparing a company to its industry

    Ratios Asset Utilization Ratios Liquidity Ratios Debt Utilization Ratios

    McGraw-Hill/Irwin

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    McGraw-Hill/Irwin

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Foundations of Financial Management Page 2

    Classification System

    PPT 3-1

    Classification System
    C. Liquidity ratios.
    9. Current ratio. 10. Quick ratio.

    PPT 3-1

    We will separate 13 significant ratios into four primary categories. A. Profitability Ratios.
    1. Profit margin. 2. Return on assets (investment). 3. Return on equity.

    D. Debt utilization ratios.


    11. Debt to total assets. 12. Times interest earned. 13. Fixed charge coverage.

    B. Asset utilization ratios.


    4. 5. 6. 7. 8. Receivable turnover. Average collection period. Inventory turnover. Fixed asset turnover. Total asset turnover.
    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    McGraw-Hill/Irwin

    McGraw-Hill/Irwin

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    PPT 3-2 TABLE 3-1 Financial statement for ratio analysis

    Profitability Ratios
    Show how profitable a company is. The ratios express:

    LT 3-4

    Profit Margin or Return on Sales (%) Return on Assets or Return on Investment (%) Return on Equity (%)
    McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Foundations of Financial Management Page 3


    PPT 3-3 FIGURE 3-1 Du Pont analysis PPT 3-4

    Profitability Ratios
    Saxton Company 1. Profit margin = Net income
    sales $200,000 = 5% $4,000,000

    Industry Average 6.7%

    2. Return on assets (investment) = a.


    Net income Total assets Sales Sales Total assets $200,000 $1,600,000 = 12.5%

    10% 10%

    b. Net income

    5% 2.5 = 12.5%
    $200,000 = 20% $1,000,000 0.125 = 20% 1 0.375

    3. Return on equity = a. b.
    Net income Stockholders equity Return on assets (investment) (1 Debt/Assets)

    15% 15%
    McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    McGraw-Hill/Irwin

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    PPT 3-5 TABLE 3-2 Return of Wal-Mart versus May Department Stores using the Du Pont method of analysis, 2002

    Asset Utilization Ratios

    LT 3-5

    Show how effectively a company uses its assets. The ratios express:
    Receivables Turnover (times) Average Collection Period (days) Inventory Turnover (times) Fixed Asset Turnover (times) Total Asset Turnover (times)
    McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Foundations of Financial Management Page 4


    PPT 3-6 PPT 3-6

    Asset Utilization Ratios


    Saxton Company 4. Receivables turnover = Sales (credit) Receivables 5. Average collection period = Accounts receivable Average daily credit sales 6. Inventory turnover = Sales Inventory
    McGraw-Hill/Irwin

    Asset Utilization Ratios


    Saxton Company 7. Fixed asset turnover =

    Industry Average

    Industry Average

    $4,000,000 = 11.4 $350,000

    10 times

    Sales Fixed assets 8. Total asset turnover = Sales Total assets

    $4,000,000 =5 $800,000 $4,000,000 = 2.5 $1,600,000

    5.4 times

    $350,000 = 32 $11,111

    36 days

    1.5 times

    $4,000,000 = 10.8 $370,000

    7 times
    McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Profitability and Turnover Ratios


    Remember: Return on X = Net Income / X X Turnover = Sales / X

    LT 3-6

    Liquidity Ratios

    LT 3-7

    Show how liquid a company is or how much $ it has to meet S/T needs. The ratios express:
    Current Ratio (times) Quick Ratio or Acid-Test Ratio (times)

    McGraw-Hill/Irwin

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    McGraw-Hill/Irwin

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Foundations of Financial Management Page 5


    PPT 3-7

    Liquidity Ratios
    Saxton Company 9. Current ratio =
    Current assets Current liabilities $800,000 = 2.67 $300,000

    Debt Utilization Ratios


    Industry Average

    LT 3-8

    Show how well a company is managing or using debt. The ratios express:
    Debt-to-Total Assets (%) Times Interest Earned (times) Fixed Charge Coverage (times) (Fixed Charges = lease payments, i expense)
    McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    2.1

    10. Quick ratio =


    Current assets Inventory Current liabilities $430,000 = 1.43 $300,000

    1.0

    McGraw-Hill/Irwin

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Debt Utilization Ratios


    Saxton Company 11. Debt to total assets = Total debt Total assets 12. Times interest earned = Income before interest and taxes Interest 13. Fixed charge coverage = Income before fixed charges and taxes Fixed charges
    McGraw-Hill/Irwin

    PPT 3-8

    TABLE 3-3 Ratio analysis

    PPT 3-9

    Industry Average

    $600,000 = 37.5% $1,600,000

    33%

    $550,000 $50,000

    = 11

    7 times

    $600,000 =6 $100,000

    5.5 times

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    McGraw-Hill/Irwin

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Foundations of Financial Management Page 6


    PPT 3-10

    Importance of Ratios

    LT 3-9

    FIGURE 3-2 Trend analysis

    Which ratio is most important? It depends on your perspective. Suppliers and banks (lenders) are most interested in liquidity ratios. Stockholders are most interested in profitability ratios. A long-run trend analysis over a 5-10 year period is usually performed by an analyst.
    McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    PPT 3-11 TABLE 3-4 Trend analysis in the computer industry

    Inflations Impact on Profits


    FIFO

    LT 3-10

    (First-In, First-Out) Inventory:

    Lowers COGS Raises Profits


    LIFO

    (Last-In, First-Out) Inventory:

    Raises COGS Lowers Profits


    McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Foundations of Financial Management Page 7

    PPT 3-12 TABLE 3-7 Comparison of replacement cost accounting and historical cost accounting TABLE 3-8

    PPT 3-13

    McGraw-Hill/Irwin

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    McGraw-Hill/Irwin

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

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