# Ratio Analysis A RATIO ANALYSIS IS A QUANTITATIVE

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Ratio Analysis A RATIO ANALYSIS IS A QUANTITATIVE ANALYSIS OF INFORMATION CONTAINED IN A COMPANY’S FINANCIAL STATEMENTS. RATIO ANALYSIS IS USED TO EVALUATE VARIOUS ASPECTS OF A COMPANY’S OPERATING AND

Liquid Ratio Liquidity - ability to satisfy short-term debt Current Ratio – Current Assets Current Liabilities Value of liquid assets available to cover short-term debt – higher the better Quick Ratio – Current Assets – Inventory Current Liabilities Value of extremely liquid assets available to cover short-term debt – higher the better

Assets Liabilities Current Assets Current Liabilities Cash \$2. 550 Accounts Payable \$9, 500 Marketable Securities \$2, 000 Short-term Bank Loan \$11, 375 Accounts Receivable \$16, 675 Total Current Liabilities Inventories \$26, 470 Total Current Assets \$47, 695 \$20, 875

Activity Ratio Activity- speed with which various accounts are converted into sales or cash Inventory – Sales Inventory Average Age – 360 of Inventory Turnover How many times during the year the company reorders inventory – lower number means more cash on hand How many days goods stay in stock before being sold

Activity Ratio Accounts – Total Sales Receivable A/R Turnover How quickly credit sales are converted to cash – why can high number be good or bad? Average Collection - Accounts Receivable Number of days it takes company to collect from customers – the Period Sales/360 lower the number the quicker you get cash Total Asset - Sales The amount of sales generated by each Turnover Total Assets dollar of assets – higher is better

From Balance Sheet CURRENT ASSETS: From Income Statement REVENUE: Cash \$ 2, 550 Sales \$112, 500 Marketable securities \$ 2, 000 Cost of Goods Sold(COGS) \$ 85, 040 Account Receivable (Net) \$16, 675 Gross Margin \$ 27, 460 Inventories \$26, 470 Total Current Assets \$47, 695

Debt Ratio Debt Ratios - degree of indebtedness and the ability of the firm to pay debts Debt Ratio – Total Liabilities Total Assets Times Interest– Operating Income Earned Interest Expense Percentage of firms assets owned by others (creditors) – higher means they are at more of a financial risk How many times a year the company makes enough income to pay interest expenses – less than one means they cannot pay interest

Current assets 500, 000 Non-current assets 845, 000 alculate debt ratio for PQR, Inc. based on the information given below: Non-current liabilities 340, 000 Current liabilities 270, 000 Accounts payable 20, 00

A business has net income of \$100, 000, income taxes of \$20, 000, and interest expense of \$40, 000.

Profitability Ratio Profitability - ability to earn income Gross Profit– Gross Profit Margin Sales Percentage of Sales dollars left after goods purchased – higher means more stable company – for every dollar, how much is left expenses Operating Profit– Operating Profit Margin Sales Percentage of sales dollar left after goods are purchased & operating expenses paid – higher means more stable – what is cash flow?

Profitability Ratio Net Profit – Net Income Margin Sales Return on Assets- Net Income Total Assets Return on Equity- Net Income CS Equity Percentage of sales dollar left after all expenses are deducted – higher means more stable company – for every dollar, how much is profit? How much money the firm earned from each dollar of asset investment – higher the number means more stable – for every dollar invested, how much profit? How much money the firm earned from each dollar of shareholder investment – higher the number means more stable – for every dollar invested, how much profit?

Balance Sheet Income Statement Balance Sheet Assets Sales 112, 500 Equity Cash 2, 550 Cost of Goods Sold 85, 040 Common Shares 25, 000 Marketable Securities 2, 000 Gross Margins 27, 640 RE 7, 820 AR 16, 675 Total Equity 32, 820 Inventories 26, 470 Operating Expenses 18, 950 Plant and Equipment 41, 000 Net Income Before 8, 510 taxes Accumulated Depreciation (11, 000) Income taxes 4, 163 Total Assets 77, 695 Net Income 4, 347

Market Ratio Market - relate a firm’s current price in the market to accounting values Number of dollars earned on behalf of Earnings per– Net Income each shareholder – higher is better Share # CS shares outstanding a high P/E suggests that investors are expecting higher Price/Earnings– Market Price Earning per Share Market to – Market Price Book CS Equity / Issued Shares earnings growth in the future compared to companies with a lower P/E. A low P/E can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to its past trends. How much more investors are willing to pay for stock than the amount listed in the balance sheet - if the ratio is above 1 then the stock is undervalued; if it is less than 1, the stock is overvalued.

CS Equity Issued Shares Earnings (Net Income) Weighted Shares Outstanding Market Price 1, 835, 000 274, 500 \$13. 64 billion 3. 1 billion \$91. 09