MGT 497 Financial, Trends, Ratios Prof. Rick Hayes, Ph.D., CPA

Game Weighting Factors Return on Assets (ROA) Return on Equity (ROE) Market Share (MS) Stock Price (SP) Unit Production Costs (UPC) Total Net Income (TNI)

Average Net Income Yr 3 thru 6 Average Year End Assets Yrs 3 thru 6 Return on Assets (ROA) Return on Total Assets Average Net Income Yr 3 thru 6 Average Year End Assets Yrs 3 thru 6 = This ratio measures how well assets have been employed. 55 55

Return on Equity Return on Equity Average Net Income Yrs 3 thru 6 Average Shareholders’ Equity Yrs 3 thru 6 = This ratio measures the ability of management to generate net income from the resources the owners provide. 56 56

Market Share, Stock Price, Unit Production Cost Total Company Dollar Sales Yrs 3 t 6 Total Industry Dollar Sales Yrs 3 thru 6 = Stock Price = Average Year end stock Price Years 3 thru 6 Unit Production Cost (UPC) = Average Unit Production Cost Years 3 thru 6 Total Net Income (TNI) = Sum of Net Income for Years 3 thru 6 56 56

Ratios Liquidity: Current Ratio Leverage: Debt to Equity Quick Ratio Leverage: Debt to Equity Times Interest Earned (Times Covered) Debt to Assets Profitability: Net/Gross profit margins Return on Invested Capital (ROIC) Return on Total Assets (ROA) Return on Shareholder’s Equity (ROE) Activity: Days Sales Outstanding (DSO) Inventory Turnover Shareholder : Total Shareholder Returns Returns Price Earnings Ratio (P/E) Dividend Yield Illustration 7.3 35

Measures a company’s ability to satisfy its short-term liabilities Liquidity Ratios = Current ratio Current assets Current liabilities Measures a company’s ability to satisfy its short-term liabilities = Acid-test ratio Quick assets Current liabilities Provides a more stringent indication of a company’s ability to pay its current liabilities

Leverage Ratios Total liabilities Debt to equity ratio = Debt to equity ratio Total liabilities Shareholders’ equity Indicates the extent of reliance on creditors, rather than owners, in providing resources = Times interest earned ratio Net income + Interest expense + Taxes Interest expense Indicates the margin of safety provided to creditors

Profit Ratios Profit Margin on Sales Net Income Net Sales = This ratio indicates the portion of each dollar of revenue that is available to cover expenses. 54 54

This ratio measures how well assets have been employed. Return on Total Assets Return on Total Assets Net Income Average Total Assets = This ratio measures how well assets have been employed. 55 55

Return on Invested Capital Profit Ratios Net income Total assets = Return on assets Net Profit Invested Capital = Return on Invested Capital

Average Shareholders’ Equity Return on Equity Return on Equity Net Income Average Shareholders’ Equity = This ratio measures the ability of management to generate net income from the resources the owners provide. 56 56

Receivables Turnover Ratio Net Sales Average Accounts Receivable Receivables Turnover Ratio = Whenever a ratio divides an income statement balance by a balance sheet balance, the average for the year is used in the denominator. This ratio measures how many times a company converts its receivables into cash each year. 48 48

Days Sales Outstanding or Average Collection Period 365 Receivables Turnover Ratio Average Collection Period = This ratio is an approximation of the number of days the average accounts receivable balance is outstanding. 50 50

Inventory Turnover Ratio Cost of Goods Sold Average Inventory Inventory Turnover Ratio = This ratio measures the number of times merchandise inventory is sold and replaced during the year. 50 50

Average Days in Inventory 365 Inventory Turnover Ratio Average Days in Inventory = This ratio indicates the number of days it normally takes to sell inventory. 50 50

Basic Earnings Per Share *Current period’s cumulative preferred stock dividends (whether or not declared) and noncumulative preferred stock dividends (only if declared). Simple Capital Structure (Basic EPS) Net income (after tax) – Preferred dividends* Weighted average outstanding common stock Number of shares outstanding × Number of months outstanding ÷ 12 Weighted average shares outstanding

Shareholder Return Ratios Market price per share Earnings per share = Price-Earnings Ratio Dividend per share Market price per share = Dividend Yield