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BS
LTD
SG&A
R&D
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STD
RR
CV
EBITDA
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Balance Sheet
Long-Term Debt
Selling, General & Admin
Research &
Development
Short-Term Debt
Retention Ratio
Coefficient of Variation
Earnings before Interest,
Tax, Depreciation &
Amortization
28.a
Common size statements allow the analyst to more easily compare performance.
Vertical common-size B.S express as % of total assets.
Vertical common-size I.S express as a % of sales.
Common size I.S ratios are useful in studying trends in costs & profit margins, I.S
account / sales.
B/S accounts can also be converted to common-size ratio as, B.S account/ total
assets.
Stacked column graph shows in items from year to year in graphical form.
Ratios are used in internal comparisons & comparisons across firms.
Their limitations are:
Different accounting treatment & divisions of one firm operating in multiple
industries.
Not useful when viewed in isolation or one set of ratios.
Need to use judgment when analyzing the results of ratio analysis.
28.b
GP
NP
PV
ROE
TA
TE
SD
IS
EBIT
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Gross Profit
Net Profit
Present Value
Return On Equity
Total Assets
Total Equity
Standard Deviation
Income Statement
Earnings before Interest
& Tax
Liquidity Ratios
if <, 1
Quick Ratio =
Cash + short term marketable securities + receivables
Current liabilities
Cash Ratio =
Cash + short term marketable securities
Current liabilities
Financial Ratios
Activity Ratios
Liquidity Ratios
Ability to meet
short-term
obligations.
Solvency Ratios
Profitability Ratios
Valuation Ratios
Financial leverage
& ability to meet
longer term
obligations.
How well a
company generate
profits on its
investment.
Activity Ratios
Receivable turnover = annual sales / average receivables, (desirable, close to industry norm).
Days of sales outstanding= 365 / receivable turnover.
Collection period too long, too much capital tied in assets, (too low, may hamper sale).
Inventory turnover = cost of goods sold / avg. inventory.
Days of inventory on hand = 365 / inventory turnover, (desirable close to industry norm).
Process period too high, too much capital tied up in inventory (obsolete inventory), if too low, inadequate stock.
Payable turnover = purchases / avg. trade payables.
Number of days of payables = 365 / payable turnover ratio
Total asset turnover = revenue / avg. total assets.
Fixed asset turnover = revenue / avg. net fixed assets.
Net refers to net of Acc. Depreciation.
Working capital turnover = revenue / avg. working capital.
Liquidity Ratios
Solvency Ratios
Total debt is calculated differently by different analysts.
Here (interest-bearing STD and LTD).
Debt-to-capital = total debt / (total debt + total equity).
Capital = short & LTD + preferred stock & equity.
Debt -to- assets = total debt / total assets.
Interest coverage = EBIT / interest payments,(firms ability to repay debts).
Fixed charge coverage = (EBIT + lease payments) / (interest payments + lease payments).
(Suitable for companies that lease a large portion of assets).
Profitability Ratios
Net profit margin should be based on net income from continuing operations.
See G.P & N.P margin.
Operating profit margin = EBIT / sales (EBIT = GP SG&A (analyst should be consistent in calculation method).
Pretax margin = EBT / revenue.
Return on assets = N.I / avg. total assets
misleading, because interest excluded from N.I but total assets include debt as well as equity. Alternative calculation is:
Return on assets = [net income + interest expense (1-tax rate)] / avg. total assets.
Operating return on assets = EBIT / avg. total assets.
Return on total capital = EBIT / avg. total capital
alternative way is to include PV of operating leases as asset & liability.
Return on equity = net income / avg. total equity.
Return on common equity = (N.I preferred dividends) / avg. common equity.
Analyst should be concerned if these ratios are low.
DuPont System
ROE = [N.I / EBT] [EBT / EBIT] [EBIT / sales] [sales / T.A] [T.A
/ T.E].
in tax or interest burden will ROE.
More leverage does not always lead to higher ROE (as
leverage rise, so does the interest burden).
28.e
CVsale =
SD of Sales
Mean Sales
CVEBIT =
SD of EBIT
Mean EBIT
SD of N.I
28.f
Sensitivity Analysis
What if questions.
Scenario Analysis
Simulation