FINANCIAL-RATIO.pdf

FINMAN4 CAUTIONS IN USING FINANCIAL RATIO ANALYSIS FINANCIAL STATEMENTS ANALYSIS - FINANCIAL RATIOS It is sometimes difficult to iden...

FINMAN4 CAUTIONS IN USING FINANCIAL RATIO ANALYSIS FINANCIAL STATEMENTS ANALYSIS - FINANCIAL RATIOS It is sometimes difficult to identify industry categories or comparable peers. Ratios that reveal large deviations from the Financial Ratio – is a comparison in fraction, norm merely indicate the possibility of a proportion, decimal or percentage form of two problem. significant figures taken from financial statements. A single ratio does not generally provide - It expresses the direct relationship between two sufficient information from which to judge or more quantities in the statement of financial the overall performance of the firm. One or position or statement of comprehensive income. two ratios, however, will suffice if analysis is - It involves methods of calculating and concerned with certain specific aspects of the interpreting financial ratios to analyze and firm only. monitor the firm’s performance. Ratios being compared should be calculated using financial statements dated at the same USES OF FINANCIAL RATIOS point in time. WITHIN THE FIRM It is preferable to use audited financial Identify deficiencies in a firm’s performance statements for ratio analysis. and take corrective action. The published peer group or industry Evaluate employee performance and averages are only approximations, thus determine incentive compensation. industry averages may not provide a desirable target ratio. Compare the financial performance of the firm’s different divisions. Accounting practices differ widely among firms. Prepare, at both firm and division levels, financial projections. Seasons may bias the numbers in the financial statements. Understand the financial performance of the firm’s competitors. The financial data being compared should have been developed in a consistent manner. Evaluate the financial condition of a major supplier. Inflation may distort ratio analysis results. OUTSIDE THE FIRM Financial ratios are used by: CATEGORIES OF FINANCIAL RATIO Lenders in deciding whether or not to lend to Liquidity Ratio a company. Activity Ratio Credit-rating agencies in determining a firm’s credit worthiness. Leverage Ratio Investors (shareholders and bondholders) in Profitability Ratio deciding whether or not to invest in a company. Market Ratios Major suppliers in deciding to whether or not to extend credit to a company and/or in designing the specific credit terms. LIQUIDITY RATIO ∗ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝐴/𝑅, 𝐵𝑒𝑔 + 𝐴/𝑅, 𝐸𝑛𝑑 - measures the firm’s ability to pay off debts = 2 maturing within a year or within the next B. Days Sales Outstanding (also called as operating cycle. Average Collection Period or Average Age Basic Liquidity Ratios: of Receivables) – measures the average number of days to collect a receivable. It is a. Current Ratio – measures the firm’s ability used to evaluate the company’s accounts to meet its short-term obligations. It is the receivable liquidity and its credit and primary test of solvency to meet current collection policies. obligations using current assets as a going concern, and it measures the adequacy of Formula: working capital. 𝑁𝑜. 𝑜𝑓 𝐷𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑌𝑒𝑎𝑟 𝐷𝑎𝑦𝑠 𝑆𝑎𝑙𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 = Formula: 𝐴𝑅 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑅 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 𝑜𝑟 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 ∗ 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 b. Defensive Interval Ratio – measures the ∗ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝑁𝑒𝑡 (𝐶𝑟𝑒𝑑𝑖𝑡) 𝑆𝑎𝑙𝑒𝑠 length of time in days the firm can operate on 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 = its present liquid resources 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐷𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑌𝑒𝑎𝑟 Formula: C. Inventory Turnover Ratio – measures the firm’s 𝐷𝑒𝑓𝑒𝑛𝑠𝑖𝑣𝑒 𝐼𝑛𝑡𝑒𝑟𝑣𝑎𝑙 𝑅𝑎𝑡𝑖𝑜 efficiency in managing and selling its 𝐶𝑎𝑠ℎ + 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 inventories. This ratio indicates if a firm holds +𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 excessive stocks of inventories that are = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 unproductive and that lessens the company’s profitability. Formula: ACTIVITY RATIO 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠 - measures the efficiency of the company in 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 ∗ converting its resources into sales or cash (operations). ∗ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐼𝑛𝑣𝑡𝑦, 𝐵𝑒𝑔 + 𝐼𝑛𝑣𝑡𝑦, 𝐸𝑛𝑑 = Basic Activity Ratios: 2 A. Accounts Receivable Turnover Ratio – D. Days Supply in Inventory (also called as measures the firm’s velocity of collection of Average Age of Inventory) – measures the trade accounts. This tests the company’s average number of days to sell or consume efficiency in collection of accounts. the average inventory. Formula: Formula: 𝐴 𝑁𝑜. 𝑜𝑓 𝐷𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑌𝑒𝑎𝑟 𝑅 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝐷𝑎𝑦𝑠 𝑆𝑢𝑝𝑝𝑙𝑦 𝑖𝑛 𝐼𝑛𝑣. = 𝑁𝑒𝑡 (𝐶𝑟𝑒𝑑𝑖𝑡) 𝑆𝑎𝑙𝑒𝑠 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 ∗ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑟 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐶𝑂𝑆 ∗  ∗ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠 ∗ 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠, 𝐵𝑒𝑔+ = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠, 𝐸𝑛𝑑 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐷𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑌𝑟 2 H. Investment/Asset Turnover Ratio – measures E. Accounts Payable Turnover Ratio – the firm’s efficiency in using its available measures the firm’s efficiency in meeting its resources (assets) to generate sales. accounts payable. Formula: Formula: 𝐼𝑛𝑣. 𝑁𝑒𝑡 (𝐶𝑟𝑒𝑑𝑖𝑡) 𝑃𝑢𝑟𝑐ℎ. 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝐴𝑃𝑇𝑅 = /𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑃 ∗ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 ∗ ∗ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 ∗ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠, 𝐵𝑒𝑔 + 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠, 𝐸𝑛𝑑 𝐴𝑃, 𝐵𝑒𝑔 + 𝐴𝑃, 𝐸𝑛𝑑 = = 2 2 F. Average Payment Period (also called as I. Capital Intensity Ratio – measures the Average Age of Payables) – measures the intensity of the company’s use of investment to average number of days a company pays its generate revenue for the company. accounts payable. It determines whether the company is paying its invoices on a timely basis. Formula: It is used to evaluate the company’s payment 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 policies. 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 = 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 Formula: 𝑁𝑜. 𝑜𝑓 𝐷𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑌𝑟 𝐴𝑣𝑒. 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 = LEVERAGE RATIO 𝐴𝑃 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 - measures how risky the firm is, the degree of 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑃 𝑜𝑟 use of debt facilities to finance resources and 𝐴𝑣𝑒. 𝐷𝑎𝑖𝑙𝑦 𝑁𝑒𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 ∗ operations, and the company’s solvency. ∗ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝑁𝑒𝑡 (𝐶𝑟𝑒𝑑𝑖𝑡) 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 Basic Leverage Ratios: 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = A. Debt Ratio – measures the proportion of total 𝑁𝑜. 𝑜𝑓 𝐷𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑌𝑟 assets financed with debt. G. Plant/Fixed Asset Turnover Ratio – measures Formula: the level of use of property, plant and equipment 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 in operations. It is used to test roughly the 𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 efficiency of management in keeping plant properties employed. B. Equity Ratio – measures the proportion of total Formula: assets financed with equity. 𝑃𝑙𝑎𝑛𝑡 Formula: 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 /𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 ∗ 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠  𝑜𝑟 1 − 𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 G. Operating Leverage Factor (Degree of Operating Leverage) – measures the extent to C. Debt to Equity Ratio – measures debt relative to which a company uses fixed costs in its cost amounts of resources provided by owners. It structure. It also a measure of the risk of provides a comparison of percentage of resources profitability of an entity given the volatility of provided by the creditors against those provided sales volume. by the business owners. Formula: Formula: 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛𝑔 𝑂𝐿𝐹 = 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 𝐷𝑒𝑏𝑡 𝑡𝑜 𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 PROFITABILITY RATIO D. Times Interest Earned Ratio – measures the firm’s ability to make contractual interest - measures how profitable the company is in its payments. It measures how many times interest operations and usage of resources. expense is covered by operating profit. Basic Profitability Ratios: Formula: A. Gross Profit Margin – measures the proportion 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡/𝐸𝐵𝐼𝑇 of earnings to the sales after the cost of sales were 𝑇𝐼𝐸𝑅 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 paid. Formula: E. Fixed Payment Coverage Ratio – measures the firm’s ability to meet all fixed payment 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 obligations. This simply expands the coverage of 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 times interest earned ratio by including other fixed payments. B. Operating Profit Margin – measures the - Fixed charges – defined as payments other than proportion of earnings to the sales after all costs interest expenses that have fixed determinable expenses other than interest and taxes were paid. payments periodically (e.g. Lease payments, sinking bond payments). Formula: Formula: 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝐹𝑖𝑥𝑒𝑑 𝐶ℎ𝑎𝑟𝑔𝑒𝑠 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝐹𝑃𝐶𝑅 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 + 𝐹𝑖𝑥𝑒𝑑 𝐶ℎ𝑎𝑟𝑔𝑒𝑠 C. Net Profit Margin – measures the proportion of earnings to the sales after all costs and expenses F. Financial Leverage Multiplier (Equity were paid. Multiplier) – measures the extent to which the company uses debt in financing asset investment. Formula: Formula: 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = (𝐴𝑣𝑒𝑟𝑎𝑔𝑒)𝐴𝑠𝑠𝑒𝑡𝑠 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = (𝐴𝑣𝑒𝑟𝑎𝑔𝑒)𝐸𝑞𝑢𝑖𝑡𝑦 D. Earnings Per Share – measures the peso return on each ordinary share. It reflects the company’s earning power, i.e. its ability to generate profit MARKET RATIO from normal operations. - relates the firm’s market value, as measured by Formula: its current share price, to certain accounting 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 values. It gives insight into how investors in the 𝐸𝑃𝑆 = 𝑡𝑜 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 marketplace feel the firm is doing in terms of 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑚𝑚𝑜𝑛 risk and return. 𝑆𝑡𝑜𝑐𝑘 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 E. Return on Investment (or Return on Asset) – Basic Market Ratios: measures the overall effectiveness of the A. Price/Earnings Ratio – measures the amount management in generating profits with its that investors are willing to pay for each dollar of available assets. This ratio indicates whether the a firm’s earnings. The level of this ratio indicates management is using the available funds or the degree of confidence of the investors in the investment wisely in the operations company’s future performance. Formula: Formula: 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 = 𝑃/𝐸𝑅 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 OR B. Market/Book Ratio – provides an assessment of 𝑅𝑂𝐼 = 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑋 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 how investors view the firm’s performance. It relates the market value of the firm’s share to its F. Return on Equity – measures the return earned book value. on the shareholders’ investment in the firm. Formula: 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝑀/𝐵𝑅 = 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 Formula: C. Dividend Yield Ratio – shows the rate earned by 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 shareholders from dividend relative to current 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 = price of stock. 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝐸𝑞𝑢𝑖𝑡𝑦 OR 𝑅𝑂𝐼 = 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑋 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑖𝑜 ∗ Formula: 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 * 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑌𝑖𝑒𝑙𝑑 𝑅𝑎𝑡𝑖𝑜 = 𝐹𝐿𝑅 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝐸𝑞𝑢𝑖𝑡𝑦 D. Dividend Payout Ratio – shows the percentage of earnings paid to shareholders. Formula: 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦𝑜𝑢𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 DUPONT SYSTEM OF ANALYSIS - used to dissect the firm’s financial statements and to assess its financial condition. - It merges the income statement and balance sheet into two summary measures of profitability, the ROA and the ROE. - The DuPont system first brings together the net profit margin, which measures the firm’s profitability on sales, with its total asset turnover, which indicates how efficiently the firm has used its assets to generate sales. 𝑅𝑂𝐼 = 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 𝑋 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 - The modified DuPont Formula relates the firm’s return on total assets to its return on common equity. The latter is calculated by multiplying the return on total assets (ROA) by the financial leverage multiplier (FLM) 𝑅𝑂𝐸 = 𝑅𝑂𝐼 𝑋 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟