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INTERNAL ASSESSMENT FINANCE/ACCOUNTING
THREE DECISION AREAS; INVESTMENT DECISION- WHAT ASSETS TO BUY FINANCING DECISION- WHAT IS THE BEST CAPITAL STRUCTURE DIVIDEND DECISION- WHAT PER CENT OF EARNINGS TO PAY TO STOCKHOLDERS
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RATIO ANALYSIS PROVIDE A PICTURE AT A POINT IN TIME
MEASURES STRENGTH AND WEAKNESS CAN PROVIDE A COMPARISON WITH INDUSTRY NORMS PROVIDES A COMPARISON WITH INDUSTRY LEADERS NEEDS TO BE LOOKED AT OVER TIME
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TYPES OF FINANCIAL RATIOS
LIQUIDITY-MEASURES ABILITY TO PAY SHORT TERM DEBT LEVERAGE - THE EXTENT OF DEBT IN THE CAPITAL STRUCTURE ACTIVITY- HOW EFFECTIVELY A FIRM USES ITS ASSETS PROFITABILITY- HOW MUCH VALUE DOES THE FIRM CREATE GROWTH-MEASURES THE FIRM’S ABILITY TO MAINTAIN ITS ECONOMIC POSITION
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LIQUIDITY RATIOS LIQUIDITY RATIOS
CURRENT RATIO=CURRENT ASSETS/CURRENT LIABILITIES 1984 = 1.90 1989 = 1.99 1997 = 1.30 NESTLE, 1997 = 1.22 MERCK, 1997 = 1.47
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LEVERAGE RATIOS DEBT TO ASSETS- TOTAL DEBTS/ TOTAL ASSETS
1984 = = = 40.03 NESTLE, 1997 = 23.60 MERCK, 1997 = 8.71 DEBT TO EQUITY- TOTAL DEBT/ EQUITY 1984 = = = 2.85 NESTLE, 1997 = 1.24 MERCK, 1997 = 1.05
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ACTIVITY RATIOS TOTAL ASSET TURNOVER- SALES/TOTAL ASSETS
1984 = = = 1.33 NESTLE, 1997 = 1.27 MERCK, 1997 = .94
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PROFITABILITY RATIOS NET PROFIT MARGIN- NET INCOME/ SALES
1984 = 5.74% = 7.07% = 7.82% NESTLE, 1997 = 5.72% MERCK, 1997 = 19.52% RETURN ON EQUITY 1984 = 16.44% = 16.12% = 39.43% NESTLE, 1997 = 16.41% MERCK, 1997 = 37.54%
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GROWTH RATIOS EPS= NET INCOME/ NO. SHARES OUTSTANDING
HERSHEY NESTLE MERCK 5 YR. AVE 5 YR. SALES 5 YR. NI
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RETURN ON EQUITY EFFECTIVENESS X EFFICIENCY X LEVERAGE = RETURN ON EQUITY (SALES/ TOTAL ASSETS) X (NET INCOME)/ SALES X (TOTAL ASSETS)/ EQUITY = ROE HERSHEY, (000) (4397/3256) X (343/4397) X (3256/905) = 39.43
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