Financial Statement Analysis(2) (2) (copy)

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Liquidity Ratios

Liquidity Ratios

Can the company meet its short-term obligations using the resources it currently has on hand

Current Ratio

Current Assets / Current Liabilities

Quick Ratio

(Current Assets - Inventory) / Current Liabilities

Asset Management Ratios

How efficiently does the firm use its assets, how much does the firm have tied up in assets for each dollar of sales

Inventory Turnover Ratio

COGS / Avg Inventories —> avg inventories = (inventory year 1 + inventory year 2) / 2

Days Sales Outstanding (DSO)

Average number of days from sale until cash is recieved

Receivables / (Sales / 365)

Fixed Assets Turnover

Sales / Avg.Net Fixed Assets

Total Assets Turnover

Sales / Avg, Total Assets

Debt Management Ratios

Does the company have too much debt, can the company’s earnings meet its debt servicing requirements

Debt Ratio

Total Debt / Total Assets

Liabilities to Assets Ratio

Total Liabilities / Total Assets

Times Interest Earned

The ability of a company to cover its interest expenses with its earning

EBIT / Interest Exp

EBITDA Coverage

(EBIT + D&A + Lease Payments) / (Interest Exp + Lease Pmt + Loan Pmt)

Profitability Ratio

What is the company’s rate of return on sales, assets?

Net profit margin

Net Income / Sales

Operating profit margin

EBIT / Sales

Gross Profit Margin

(Sales - COGS) / Sales

Basic Earning Power

Measures its ability to generate earnings from its assets before considering the effects of taxes and financial leverage

EBIT / Avg Total Assets

Return on Assets

Net Income / Avg. Total Assets

Return on Equity

Net Income / Avg. Common Equity

Market Value ratios

High current levels of earnings and cash flow increase market value ratios

High expected growth in earnings and cash flow increases market value ratios

High risk of expected growth in earnings and cash flow decreases market value ratios

Earnings per Share (EPS)

Net Income / Avg. Shares Outstanding

Price per Earning (P/E)

How much investors will pay for $1 of earnings. Higher is better.

Price per share / EPS

Cash Flow per Share

(NI + Depr) / Shares outstanding

P/CF

Price per share / Cash flow per share

Book Value Per Share

Common equity / Shares outstanding

M / B

How much paid for $1 of book value. Higher is better.

Mkt price per share / Book value per share

DuPont System

Profit Margin x Total Asset Turnover x Equity Multiplier = ROE

(Net Income / Sales) x (Sales / Total Assets) x (Total Assets / Shareholder’s Equity)