Types of Ratio Analysis FTime Series, Historical, or Trend Analysis  Example: FCross-Sectional or Peer Comparison Analysis  Example:  Sources of Comparative Ratios: 

Types of Ratio Analysis, cont. FCommon-Size Analysis  Examples: FIndex Analysis  Example:

Common-Size Analysis HARRISON INTERNATIONAL BALANCE SHEET Assets:Liabilities and Equity: Cash 0.5%Accounts Payable 3.0% Accounts Receivable 18.8%Notes Payable 5.5% Inventories 30.8%Accruals 7.0% Total Current Assets 50.0%Total Current Liabilities15.5% Property, Plant, and Equipment 62.5%Long-term Bonds37.7% less: Accumulated Depreciation 12.5%Total Debt53.2% Total Fixed Assets 50.0% Preferred Stock 2.0% Total Assets 100.0%Common Stock 6.5% Retained Earnings38.3% Total Common Equity44.8% Total Debt + Equity 100.0%

Common-Size Analysis Harrison International’s Income Statement Nets Sales (Revenues)100.0% Less: Cost of Goods Sold (COGS) 50.0% Gross Profit 50.0% Less: Selling and Administrative Expenses 38.3% Earnings Before Interest and Taxes 11.7% Less: Interest Expenses 2.8% Earnings Before Taxes 8.8% Less: Taxes 3.5% Net Income 5.3% Less: Preferred Stock Dividend 0.5% Income Available to Common Stockholders 4.8% Less: Common Stock Dividends 2.5% Addition to Retained Earnings 2.3%

Index Analysis Nets Sales (Revenues)$3,000$3,200$3,500 Less: Cost of Goods Sold (COGS) 1,500 1,600 1,700 Gross Profit 1,500 1,600 1,800 Less: Selling and Administrative Expenses 1,150 1,200 1,250 Earnings Before Interest and Taxes Less: Interest Expenses Earnings Before Taxes Less: Taxes Net Income Less: Preferred Stock Dividend Income Available to Common Stockholders Less: Common Stock Dividends Addition to Retained Earnings

Index Analysis Nets Sales (Revenues)100.0%106.7%116.7% Less: Cost of Goods Sold (COGS)100.0%106.7%113.3% Gross Profit100.0%106.7%120.0% Less: Selling and Administrative Expenses100.0%104.4%108.7% Earnings Before Interest and Taxes100.0%114.3%157.1% Less: Interest Expenses100.0%105.9%117.7% Earnings Before Taxes100.0%117.0%169.8% Less: Taxes100.0%119.1%142.9% Net Income100.0%115.6%187.5% Less: Preferred Stock Dividend100.0%100.0%100.0% Income Available to Common Stockholders100.0%117.2%196.6% Less: Common Stock Dividends100.0%133.3%200.0% Addition to Retained Earnings100.0%100.0%192.9%

DuPont System Analysis  Importance: ROE = Profit Margin x Total Asset T/O x Equity Multiplier » » Profitability =

Altman’s Z-statistic FMultiple Discriminant Analysis » Z = 0.012X X X X X 5 where: X 1 = X 2 = X 3 = X 4 = X 5 =

Altman’s Z-statistic, cont. F Note: F Decision Rules: Z > < Z < 2.99 Z < 1.81

Ratio Analysis Conclusions F Users of Financial Ratios  F Interpretation:

Assessing Harrison International’s Performance: Ratio Analysis HARRISON INT’L, INC. Liquidity Measures:  Current Ratio =  Quick Ratio =  Net Working Capital = Asset Management Measures:  Inventory T/O =  Collection Period =  Fixed-Asset T/O =  Total-Asset T/O =  Receivables T/O = INDUSTRY AVERAGES Liquidity Measures:  Current Ratio = 3.0 x  Quick Ratio = 1.5 x  Net Working Capital = $750,000 Asset Management Measures:  Inventory T/O = 5.0 x  Collection Period = 35 days  Fixed-Asset T/O = 2.5 x  Total-Asset T/O = 1.3 x  Receivables T/O = 10.0 x Market Price = $ Common Shares Outstanding

Assessing Harrison International’s Performance: Ratio Analysis INDUSTRY AVERAGES Debt Utilization Measures:  Debt Ratio = 35%  TIE Ratio = 3.0 x  Fixed Charge Coverage Ratio = 2.5 x Profitability Measures:  Profit Margin = 5%  Basic Earning Power = 15%  Return on Assets = 6.5%  Return on Equity = 10% Market Value Ratios:  P/E Ratio = 8 x  Tobin’s Q = 1.4 x HARRISON INT’L, INC. Debt Utilization Measures:  Debt Ratio =  TIE Ratio =  Fixed Charge Coverage Ratio = Profitability Measures:  Profit Margin =  Basic Earning Power =  Return on Assets =  Return on Equity = Market Value Ratios:  P/E Ratio =  Tobin’s Q = Z =

Financial Statement Analysis HARRISON INTERNATIONAL BALANCE SHEET Assets:Liabilities and Equity: Cash 10Accounts Payable 60 Accounts Receivable 375Notes Payable 110 Inventories 615Accruals 140 Total Current Assets1,000Total Current Liabilities 310 Property, Plant, and Equipment1,250Long-term Bonds 754 less: Accumulated Depreciation 250Total Debt1,064 Total Fixed Assets1,000 Preferred Stock 40 Total Assets2,000Common Stock 130 Retained Earnings 766 Total Common Equity 896 Total Liabilities and Equity2,000

Financial Statement Analysis Harrison International’s Income Statement Nets Sales (Revenues)$3,000 Less: Cost of Goods Sold (COGS) 1,500 Gross Profit 1,500 Less: Selling and Administrative Expenses 1,150 Earnings Before Interest and Taxes 350 Less: Interest Expenses 85 Earnings Before Taxes 265 Less: Taxes 105 Net Income 160 Less: Preferred Stock Dividend 15 Income Available to Common Stockholders 145 Less: Common Stock Dividends 75 Addition to Retained Earnings 70