1 Additional Ratios (from textbook, Appendix 4B, and other sources)

2 Analyzing the Financial Statements Comparisons across time Comparisons within the industry Comparisons within the financial statements: – Common-size statements – Ratio analysis

3 Comparisons Within the Industry Financial accounting numbers can also be made more meaningful if they are compared to those of similar companies. Comparison of financial accounting numbers with industry averages is also helpful. Sources of industry information include: – Dun & Bradstreet – Robert Morris Associates – Moody – Standard & Poor

4 Comparisons Within the Financial Statements Common-size financial statements – Common size income statement (where all other components are expressed as a percentage of sales or revenues) allows for comparisons across time and across companies.

5 Common-Size Income Statement for La-Z-Boy, Inc. Income Statement (in millions) 2003 % 2002 % Net sales$2, $2, Cost of sales (1,617) 77 (1,692) 79 Expenses and charges (459) 21 (400) 18 Net income$ 36 2 $ 62 3 On the income statement, cost of goods sold, expenses, and net income are often expressed as percentages of net sales. On the balance sheet, assets and liabilities can be expressed as percentages of total assets.

6 Comparisons Within the Financial Statements Ratio analysis allows for measures of specific activities of a company. – Profitability ratios – Long-term solvency ratios – Short-term Liquidity ratios – Asset turnover ratios

7 Profitability Ratios These ratios are designed to measure a firm’s earnings power. Net income, the primary measure of the overall success of a company, is compared to other measures of financial activity or condition to assess performance as a percent of some level of activity or investment.

8 Return onNet Income Equity Average Equity This ratio measures the effectiveness at managing capital provided by the owners. Profitability Ratios

9 Return on Net Income Sales Net Sales This ratio provides an indication of a company’s ability to generate and market profitable products/services and control its costs; also called the Profit Margin.

10 Long-term Solvency Ratios Solvency examines the ability of a company to meet all of its debt obligations. Solvency ratios consider the relationship between debt and other components of the financials (assets and equity) Solvency ratios also measure the ability of the company to meet its interest obligation.

11 Solvency Ratios Capital Average Total Assets Structure Average Equity Leverage This ratio measures the extent to which a company relies on borrowings (liabilities).

12 Solvency Ratios Debt to Equity Average Total Liabilities Ratio Average Equity This ratio compares liabilities to stockholders’ equity and is another measure of capital structure leverage.

13 Solvency Ratios Interest Net Income + Tax Expense + Interest Expense CoverageInterest Expense This ratio compares the annual funds available to meet interest to the annual interest expense.

14 Solvency Ratios Solvency Ratios Accounts Cost of Goods Sold Payable Average Accounts Payable Turnover This ratio measures the extent to which accounts payable is used as a form of financing.

15 Liquidity Ratios Liquidity refers to a company’s ability to meet its current debts as they come due. There is pressure on companies with high levels of leverage to manage their liquidity.

16 Liquidity Ratios CurrentCurrent Assets RatioCurrent Liabilities This ratio measures solvency in the sense that current assets can be used to meet current liabilities.

17 Liquidity Ratios QuickCash + Marketable Securities + A/R Ratio Current Liabilities Similar to the current ratio, this ratio provides a more stringent test of a company’s liquidity.

18 Asset Turnover Ratios Asset turnover ratios are typically computed for total assets, accounts receivable, inventory, and fixed assets. These ratios measure the speed with which assets move through operations or reflect the number of times during a given period that these specific assets are acquired, used, and replaced.

19 Asset Turnover Ratios ReceivablesNet Credit Sales TurnoverAverage Accounts Receivable This ratio reflects the number of times the trade receivables were recorded, collected, and recorded again during the period. Days outstanding is an alternative measure.

20 Asset Turnover Ratios InventoryCost of Goods Sold Turnover Average Inventory This ratio measures the speed with which inventories move through operations. Days outstanding is an alternate measure.

21 Asset Turnover Ratios PPESales TurnoverAverage PPE This ratio measures the speed with which assets related to property, plant and equipment are used up.

22 Asset Turnover Ratios Total Asset Sales TurnoverAverage Total Assets This ratio measures the speed with which all assets are used up in operations.