Financial Ratios Overview

Cost of Sales Ratio

• The cost of sales ratio helps determine whether a company's costs are rising, stable, or falling in relation to sales.
• Rising trend over time indicates difficulty controlling costs and losing potential profits.
• Falling trend shows cost-effective operation and potential for future profitability.
• Understanding reasons for changes in this ratio is important.

Gross Profit Margin Ratio

• Measures a company’s ability to pay its operating costs.
• Influenced by raw material costs, especially for companies reliant on commodities.
• Introduction of new products with higher margins can improve profitability.

Dividend Record

• Shows how much the company distributes to shareholders in dividends.
• Can be found in Appendix A: Financial Statements of Trans-Canada Retail Stores Ltd.

Liquidity Ratios

• Evaluate a company's ability to convert assets into cash to meet short-term obligations.
• Insufficient working capital and difficulty liquidating current assets can lead to business failure.
• Working capital is calculated as total current assets minus total current liabilities.

Working Capital Ratio

• Measures the ability to meet current liabilities and reflects the company’s capacity to expand and take advantage of financial opportunities.
• Calculated by dividing current assets by current liabilities.
• A ratio of 2.84:1 indicates a company has $2.84 of cash and equivalents for every $1 of current liabilities.

Gross Profit Margin Ratio

• Shows profit after deducting the cost of goods sold from revenue.
• Calculated as (revenue - cost of sales) / revenue.
• A ratio of 35.50% means Trans-Canada Retail earns 35.50% of its revenue as gross profit.

Net Profit Margin Ratio

• Indicates management efficiency after considering expenses and taxes.
• Calculated as (profit - share of profit from associates) / revenue.
• Summarizes management's ability to run the business effectively.
• A ratio of 2.75% indicates 2.75% of revenue remains as profit.

Return on Common Equity Ratio

• Measures return on equity, showing earnings generated for each dollar invested by common shareholders.
• Calculated as profit / total equity.
• A declining trend suggests declining operating efficiency and less productive use of shareholder investment.

Preferred Shares

• Consider features like cumulative dividends, sinking funds, and protective provisions.
• Assess the yield compared to similar investments.
• For convertible preferred shares, consider the outlook for the common stock, the conversion price, and the duration of the conversion privilege.

Key Aspects of Company Analysis

• Company earnings highlight management’s resource utilization effectiveness.
• Statement of financial position reveals key operational aspects and factors impacting earnings.
• Financial ratios are most meaningful when compared over time and with companies in similar industries.

Liquidity Ratios

• Measure a company's ability to meet short-term commitments.
• The working capital ratio reflects a company's ability to meet obligations, expand business, and capitalize on financial opportunities.
• The quick ratio, or acid-test, provides a more conservative assessment of a company's ability to meet current obligations, focusing on cash and readily convertible assets.

This quiz covers key financial ratios including cost of sales ratio, gross profit margin ratio, dividend record, and liquidity ratios. Understanding these ratios is crucial for evaluating a company's financial health and operational efficiency. Test your knowledge on how these ratios impact profitability and asset management.