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Complete basic problems 1-5 in chapter 3
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McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Financial Analysis
3
Chapter Outline
Ratio analysis and its importance.
Use of ratio for measurements.
The Du Pont system of analysis.
Trend analysis.
Evaluation of reported income to identify distortion.
Ratio Analysis
Financial ratios
Used to weigh and evaluate the operating performance of a firm.
Used to compare performance record as against other firms in the industry.
Analyzing ratios and numerical calculations.
Such data is provided by various organizations.
Ratios and their Classification
A. Profitability ratios
1. Profit margin.
2. Return on assets (investment).
3. Return on equity.
B. Asset utilization ratios
4. Receivable turnover.
5. Average collection period.
6. Inventory turnover.
7. Fixed asset turnover.
8. Total asset turnover.
Ratios and their Classification (cont’d)
C. Liquidity ratios
9. Current ratio.
10. Quick ratio.
D. Debt utilization ratios
11. Debt to total assets.
12. Times interest earned.
13. Fixed charge coverage.
Types of Ratios
Profitability ratios
Measurement of the firm’s ability to earn an adequate return on:
Sales
Assets
Invested capital
Asset utilization ratios
Measures the speed at which the firm is turning over accounts receivable.
Types of Ratios (cont’d)
Liquidity ratios
Emphasizes the firm’s ability to pay off short-term obligations as and when due.
Debt utilization ratios
Estimates the overall debt position of the firm.
Evaluates in the light of asset base and earning power.
Financial Statement for Ratio Analysis
Profitability Ratios
Administrator (A) – Replace equations with appropriate graphics.
Du Pont System of Analysis
A satisfactory return on assets might be derived through:
A high profit margin
A rapid turnover of assets (generating more sales per dollar of its assets)
Or both
Return of …
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