Chapter 3 Financial Ratio PDF

Chapter 3 FINANCIAL RATIO 1 Financial Analysis Securities analysis Investment analysis Corporate financial analysis Identification of problems, complications, and performances 2 Corporate financial analysis To ass...

Chapter 3 FINANCIAL RATIO 1 Financial Analysis Securities analysis Investment analysis Corporate financial analysis Identification of problems, complications, and performances 2 Corporate financial analysis To assess periodic operating results and financial status of the firm To develop plans and strategies Keep performance = goal 3 Financial Ratios Important tool to analyze company’s performance at a point of time & over certain period of time To show relationships among financial statements Used by investors, managers etc. to analyze and interpret firm’s financial position and performances 4 Types of Ratios Liquidity Ratios Measure firm’s working capital management and ability to pay short-term obligations Activity Ratios Indication of the effectiveness of firm’s investment decision and management ability to utilize firm’s assets 5 Leverage Ratios Indication of firm’s effectiveness in financing decisions and propensity to use debt in financing assets (measure its financial risk) Profitability Ratios Firm’s effectiveness in working capital mgmt, investment decisions, financing decisions and the overall profitability Market or Equity Ratios Concern of stockholders 6 Liquidity Ratios Measure firm’s ability to meet its maturing or short-term obligations Focus on availability of short-term assets to pay short-term obligations Higher liquidity is preferred: higher ability to meet short-term obligations 7 Liquidity Ratios Current Ratio =Current Indication of the Higher is better (CR) assets/Current extent to the liabilities firm’s liquidity (CA/CL) Times Quick Ratio =(Current assets Firm’s ability to Higher is better (Acid Test) – Inventory)/ pay off short- (QR) Current term obligations liabilities without rely on sale of inventory Times and prepaid Net Working =Current assets Absolute +ve is better (CA Capital – Current measure of financed with (NWC) liabilities firm’s liquidity long-term RM financing) 8 Leverage/Debt Mgmt Ratios Measure the extent to which the firm uses debt to finance its investment How well can firm meet its interest payment obligations Measure the financial risks related to the financing used 9 Leverage/Debt Mgmt Ratios Debt Ratio (DR) Total debt/ Total Measures % of Lower is better assets funds provided by creditors versus owners % capital Debt to Equity Total debt/ Net Measures funds Lower is better Ratio (DER) worth provided by creditors versus owners capital Times Time Interest EBIT/ Interest Measures ability Higher is better Earned (TIE) to meet interest payments Times 10 Activity/Asset Mgmt Ratios Measures the effectiveness of the firm in managing its assets Efficiency in handling firm’s operations 11 Activity/Asset Mgmt Ratios Ave. Collection Account Average length Shorter period is Period (ACP) Receivable of time firm better (360)/ must wait after Net sales making credit sales b4 Days receiving cash Accounts 360/ ACP How effective & Higher is better Receivable efficient firm Turnover manage its (ARTO) accounts receivable Times 12 Activity/Asset Mgmt Ratios Inventory COGS/Inventory How effectively Higher is better Turnover (ITO) Or firm use Net sales/ inventory to generate sales Inventory Times Fixed Asset Net sales/ Net Measures firm’s Higher is better Turnover fixed assets utilization of (FATO) plant and equipment Times 13 Activity/Asset Mgmt Ratios Total Asset Net sales/ Total Measures firm’s Higher is better Turnover assets effectiveness in (TATO) using all of its assets Times 14 Profitability Ratios Measure the combined effects of liquidity, asset management, and debt management on overall operating results of the firm Ability to satisfy firm’s goal to maximize the owners’ wealth, to attract new capital and to grow Relative contribution margin from sales 15 Profitability Ratios Gross Profit Gross profit/ Net Measures firm’s Higher is better Margin (GPM) sales ability to control COGS relatives to sales revenue % Operating Profit EBIT/ Total Measures Higher is better Margin (OPM) sales productivity of Basic Earning assets in Power providing returns % 16 Profitability Ratios Operating Ratio Total operating Similar to OPM Lower is better (OR) expenses/ Net but looks at costs sales not profit % Net Profit EAT/ Net sales Measures after- Higher is better Margin (NPM) tax profit per Ringgit of sales after deducting all expenses % 17 Profitability Ratios Return on EAT/ Net worth Measure rate of Higher is better Common Equity return on (ROE) investment of common stockholders or net worth % Return on Total EAT/ Total Measures firm’s Higher is better Assets (ROA) assets overall return on all of its assets investment; productivity of % assets 18 Market Ratios Important to publicly traded firms Used in stock valuation process Investment portfolio decision Depends on overall performance of the firm 19  Market Ratios Earning Per Share (NI – PS Measures amount of Higher is better (EPS) Dividend) / # of earnings available to common shares common outstanding stockholders per share of common RM stock held Dividend Per Share Cash dividend to Shows amount of Higher is better (DPS) common current earnings stockholders/ # of paid out on per common shares share basis to outstanding common RM stockholders Dividend Payout Cash dividend to Indicates amount of Higher is better Ratio (DPR) common current earnings stockholders/ (Net available to Income – Preferred common Dividends) stockholders paid- % out as dividend 20  Market Ratios Dividend Yield Dividends per share/ Measure current rate Higher is better (DY) Market price of a of return earned by share investors’ per share % Book Values Per Tangible net worth/ Indicates value of Higher is better Share (BVPS) # of common shares equity for each outstanding share on common stock RM Price Earnings Ratio Market price per Indicates investors’ Higher is better (PER) share/ Earnings per preference of share company’s share in respect to earnings available Times 21 The Discussion 22 ACP, FATO AND TATO are worse ratio, only | ITO showed better ratio campared to IA. Co. is able to manage the inventory effectively. Based on ACP, FATO and TATO, the co. less efficient in utilizing their assets. 23 Liquidity ratio 1. CR is above the IA, it is a good ratio. 2. QR is below than IA, so it is a poor ratio. 3. the company face difficulty in paying any short term in the future. If QR is good, the co. is able to meet their short term obligation. 24 Profitability ratio OPM, NPM, ROA and ROE higher than IA, Thus, there are better ratio compared with IA. Company has a good performance and able to satisfy shareholders’ wealth. 25 Leverage ratio All the ratio are worse ratio compared with industry index. Company has much debt compared with IA, and it will risky to company to payback their debt and interest to creditor. For TIE ratio, the company has less ability in paying interest to their creditors. 26