Financial Analysis Professor Ronald Miolla

Agenda 1) What are ratios? 2) Purpose of financial ratios. 3) Common financial ratios. 4) Ratios in context. 5) Market ratios.

1) Ratios Take one number and compare it in relative size to another. Numerator/Denominator Ex. : 1/3 =.33 or numerator is 33% of the denominator

2) Purpose of Financial Ratios Allow for more information from the financial statements. Use data from the income statement and balance sheet.

3) Common Ratios (Net) Profit Margin (Also called Return on Sales)= net income/sales Ex: 200,000/4,000,000 =.05 or 5% Gross Profit Margin = gross profit/sales Ex: 2,000,000/4,000,000 = 50%

3) Common Ratios Return on Assets = net income/total assets Ex: 200,000/1,600,000 = 12.5% Total Asset Turnover = sales/total assets Ex: 4,000,000/2,000,000 = 2 times Option: Items from the balance sheet may be the average of the end of last year and the end of this year.

3) Common Ratios Current Ratio = current assets/current liabilities Ex: 800,000/300,000 = 2.67 Debt to total assets = total liabilities/total assets Ex: 600,000/1,600,000 = 37.5%

Ratio Context Trend Analysis – Shows performance over a number of years Industry Averages – Compare a company’s ratios to similar companies.

Market Ratios Price to Earnings Ratio = market price/EPS Ex: $25/$2.50 = 10 Also know as P/E ratio The higher it is the more expensive the stock is. Historic average is 16.

Summary Ratios provide information about a company’s performance. Key ratios: net profit margin, return on assets, price to earnings. Compare to the industry and to internal trends.