 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 19-1 Financial Statement Analysis Chapter 19

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 19-2 Purpose Tools Used - Statements - Ratio Analysis Limitations Overview

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 19-3 Balance Sheet - Common Sized - Trend or Indexed Income Statement - Common Sized - Trend or Indexed Statement of Cash Flows Financial Statements

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 19-4 Purpose of Ratio Analysis Uses - Trend analysis - Comparative analysis - Combination Use by External Analysts - Important information for investment community - Important for credit markets Ratio Analysis

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 19-5 Liquidity Ratios Activity or Mgmt Efficiency Ratios Leverage Ratios Profitability Ratios Market Price Ratios Type of Financial Ratios

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 19-6 Current Ratio Current Assets Current Liabilities Quick Ratio Current Assets - Inventory Current Liabilities Liquidity Ratios

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 19-7 Inventory Turnover Sales or Cost of Goods Sold Inventory Total Asset Turnover Sales Total Assets Activity or Management Efficiency Ratios

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 19-8 Average Collection Period Accounts Receivable Sales Per Day Days to Sell Inventory Inventory Sales Per Day Activity or Management Efficiency Ratios

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 19-9 Times Interest Earned Earnings Before Int. & Taxes Interest Expense Fixed Charge Coverage Ratios Lease Payments Principal Repayments Preferred Dividends Leverage Ratios

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill Debt to Assets Long Term Debt Assets Debt to Equity Long Term Debt Shareholders Equity Leverage Ratios

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill Net Profit Margin % Net Income Sales Return on Assets Net Income Total Assets Profitability Ratios

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill Return on Equity Net Income Common Equity Operating Margin After Depr. Operating Profit Sales Profitability Ratios

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill Price to Earnings Market Price of Stock Earnings Market-to-Book-Value Market Price of Stock Book Value Per Share Market Price Ratios

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill ROE = Net Profit Pretax Profit x EBIT x Sales Assets xx Equity (1) x (2) x (3) x (4) x (5) x Margin x Turnover x Leverage Tax Burden Interest Burden Decomposition of ROE

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill Accounting Differences - Inventory Valuation - Depreciation Inflation International Accounting Conventions Comparability Problems