©2012 McGraw-Hill Ryerson Limited 1 of 34 Learning Objectives 1.Calculate 13 financial ratios that measure profitability, asset utilization, liquidity and debt utilization. (LO1) 2.Assess a company’s source of profitability using the DuPont system of analysis. (LO2) 3.Examine the ratios in comparison to industry averages. (LO3) 4.Examine the ratios and company performance by means of trend analysis. (LO4)

©2012 McGraw-Hill Ryerson Limited 2 of 34 Learning Objectives 5.Interpret ratios and identify corrective action for abnormal results. (LO4) 6.Identify sources of distortion in reported income. (LO5)

©2012 McGraw-Hill Ryerson Limited 3 of 34 Techniques of Ratio Analysis 1.DuPont Analysis 2.Comparative Analysis 3.Trend Analysis 4.Common-Size Statements LO1/LO2/LO3/LO4

©2012 McGraw-Hill Ryerson Limited 4 of 34 Comparative vs. Trend Analysis Ratios on their own do not mean a lot Comparing a company’s ratios to those of its industry or its competitors is comparative analysis and may reveal what ratios are out of line with certain standards Comparing the same company’s ratios over a number of years is trend analysis and may reveal whether ratios are improving or worsening LO3 and LO4

©2012 McGraw-Hill Ryerson Limited 5 of 34 Table 3-3 Trend analysis of competitors Return on Assets Return on Equity Royal Bank Bank of Montreal Return on Assets Return on Equity Source: Bank of Montreal annual reports Royal Bank of Canada annual reports LO3 and LO4

©2012 McGraw-Hill Ryerson Limited 6 of 34 Figure 3-2 Trend analysis LO3 and LO4