Profitability Liquidity Ratio Analysis Ms Zucchero Ratio Analysis

Profitability & Liquidity Ratio Analysis Ms. Zucchero

Ratio Analysis This is a financial analysis tool used in the interpretation and assessment of a firm’s financial statements Profitability Ratios, Efficiency Ratios, & Liquidity Ratios

Profitability Ratios These ratios assess the performance of a firm in terms of its profit-generating ability Gross Profit Margin & Net Profit Margin

GPM - Gross Profit Margin GPM = Gross Profit/Sales Revenue X 100 A business has sales revenue of $100 million and gross profit of $70 million/100 million x 100 = 70% What does that mean? For every $100. 00 for sales the business makes $70. 00 as gross profit. For every $1. 00 of sales the business brings in. 70 cents as gross profit.

NPM - Net PRofit Margin NPM is the measure of the profit that remains after deducting all costs from the sales revenue. NPM=Net Profit before interest and tax/sales revenue x 100 A firm has sales revenue of $150 million and a net profit before interest and tax of $75 million/$150 million x 100 = 50% What does that mean? For every $100. 00 of sales revenue, the business generates NPM of $50. 00

Liquidity Ratios - Current Ratio & ACid Test(Quick) These ratios measure the ability of a firm to pay off its short-term debt obligations Current Ratio = current assets/current liabilities A business has current assets totaling $500, 000 while its current liabilities amount to $250, 000. What is the current ratio? $500, 000/$250, 000= 2 or 2: 1 $250, 000/$500, 000 =. 5 For every $1 of current liabilities the firm has $2 of current assets For every $1 of current liabilities the firm has $0. 50 of current assets

Acid Test (Quick) Ratio This is more stringent indicator of well a firm is able to meet its short-term obligations Acid Test Ratio = current assets - stock / current liabilities Suppose the business has current assets of $500, 000 and current liabilities $250, 000. The business has stock worth $150, 000. $500, 000 - $150, 000/$250, 000 = 1. 4 For every $ 1 of current liabilities the business has $1. 4 of current assets less stock

Investment Appraisal Investment appraisal refers to the quantitative techniques used in evaluating the viability or attractiveness of an investment proposal. Payback period & Average Rate of Return

Payback period Payback Period = Initial Investment Cost/Annual Cash Flow From Investment A construction engineer plans on investing $200, 000 in a new cement-mixing machine and estimates that it will generate about $50, 000 in annual cash flow. Calculate the payback period for the machine. Payback Period = $200, 000/$50, 000 = 4 years

Expected Cash Flows of A new Machine $60, 000/$120, 000 X 12 = 6 MONTHS Year Annual Net Cash Flows ($) Cumulative Cash Flows ($) 0 (300, 000) 1 60, 000 (240, 000) 2 80, 000 (160, 000) 3 100, 000 (60, 000) 4 120, 000 60, 000

a. VERAGE r. ATE OF r. ETURN This method measures the annual net return on an investment as a percentage of its capital cost It assesses the profitability per annum generated by a project over a period of time Average Rate of Return(ARR)= _____ (total returns - Capital Cost) Years of Usage_______ Capital Cost X 100 _____