1. Fin 4201/8001 1 Ratios Measure strength of various firm aspects Informational needs of creditors and investors Facilitate time-series or cross-sectional analysis Five types Activity Liquidity Debt and solvency Profitability Valuation

2. Fin 4201/8001 2 Activity Ratios 1) Inventory turnover – COGS /Avg.Inventory 2) Receivables turn – Sales / avg.Receivables 3) Working Capital turn – Sales / Avg.Working Capital 4) Fixed Assets turn – Sales / Avg.Fixed Assets 5) Total Assets turn – Sales / Avg. Total Assets

3. Fin 4201/8001 3 Examples from handout 1Inventory Turnover 4.55 Cost of goods sold2142 Average Inventory471 Avg. no. of days inventory in stock80 2Receivables turnover 10.76 Sales4063 Average Receivables378 Avg. no. of days receivables are outstanding34

4. Fin 4201/8001 4 Examples from handout 3Working capital turnover 18.26 Sales4063 Average working capital223 4Fixed assets turnover 2.60 Sales4063 Average fixed assets1563

5. Fin 4201/8001 5 Examples from handout 5Total assets turnover 1.21 Sales4063 Avg. total assets3348

6. Fin 4201/8001 6 Liquidity Ratios 1) Current – Current Asset / Current Liability 2) Quick – $+securities+AR / Current Liability 3) Cash – $+securities / Current Liability

7. Fin 4201/8001 7 Examples from handout 1Current ratio 1.25 Current Assets1020 Current Liabilities815 2Quick ratio 0.72 Cash + Mkt. sec + Accounts Receivable584 Current Liabilities815

8. Fin 4201/8001 8 Examples from handout 3Cash Ratio 0.23 Cash + Mkt. sec190 Current Liabilities815

9. Fin 4201/8001 9 Debt and Solvency Ratios 1) Long-term Debt to Capital Long-term debt + other long-term liab. / Total capital (debt + equity) 2) Long-term Debt to Equity Long-term debt + other long-term liab. / Total capital (debt + equity) 3) Times Interest Earned EBIT / Interest Expense

10. Fin 4201/8001 10 Examples from handout 1Long-term Debt to total capital (no deferred tax or CL) 0.54 Long-term debt1226 Total capital (Long-term debt plus SH's eqty) 2268 Long-term Debt to total capital (no CL) 0.60 Long-term debt plus deferred tax1547 Total capital2589

11. Fin 4201/8001 11 Examples from handout 2Long-term Debt to equity 1.18 Long-term debt1226 Total equity1042 Long-term Debt to equity 1.48 Long-term debt plus deferred tax1547 Total equity1042

12. Fin 4201/8001 12 Examples from handout 3Times Interest earned 6.92 EBIT595 Interest expenses86

13. Fin 4201/8001 13 Profitability Ratios 1) Gross Margin – Gross Profit / Sales 2) Operating Margin – Operating Income / Sales 3) Margin before Interest and Tax – EBIT / Sales 4) Pre-tax Margin – EBT / Sales 5) Profit Margin – Net Income / Sales

14. Fin 4201/8001 14 Examples from handout 1Gross margin 0.47 Gross profit1921 Sales4063 2Operating margin 0.19 Operating income753 Sales4063

15. Fin 4201/8001 15 Examples from handout 3Margin before interest and tax 0.15 EBIT595 Sales4063 4Pre-tax margin 0.14 EBT557 Sales4063

16. Fin 4201/8001 16 Examples from handout 5Profit margin 0.08 Net Income341 Sales4063

17. Fin 4201/8001 17 Valuation Ratios 1) Price to Earnings (P/E) – Price / EPS 2) Price to Book (P/B) – Price / Book value per share 3) Price to Tangible Book – Price / Total Assets – Intangibles - Goodwill Valuation Analysis Price (December, 1998)$62 Number of shares180 mn EPS (Net Income / No. of shares)$1.89 Book value (SH’s value / No. of shares)$5.79 Tangible assets per share$16

18. Fin 4201/8001 18 Examples from handout 1P/E Ratio 32.73 Price per share62 EPS per share1.89 2Price to book value 10.71 Price per share62 Book Value per share5.79 Book Value = Sh's equity / no. of shares

19. Fin 4201/8001 19 Examples from handout 3Price to Tangible Assets 3.88 Price per share62 Tangible assets per share16

20. Fin 4201/8001 20 Other stuff not covered here, but may want to address in report/presentation Return on Invested Capital (ROIC) – NOPLAT/ Invested Capital covered with spreadsheet later Return on Assets (ROA) – Net income + After-tax interest / Avg. Total Assets Return on Equity (ROE) – Net Income / Avg. Total equity

21. Fin 4201/8001 21 Other stuff not covered here, but may want to address in report/presentation DuPont system 2 is greatest when no leverage 1*2*3 = profit margin 4 = asset turnover 3 * 4 = ROA (does not depend on leverage) 5 = leverage ratio – boosts ROE only if ROA>cost capital

22. Fin 4201/8001 22 Just because Return on equity (ROE) 0.36 Net Income341 Average total equity948 OR Profit margin0.08 Total asset turnover1.21 Financial leverage3.53 Note some rounding error 0.35

23. Fin 4201/8001 23 Still more ratios PEG – PE ratio / Earnings growth evaluates if price of growth is being realized Enterprise value / EBITDA (market cap + total debt – Total cash) / EBITDA good for comparisons if high level of debt or high level of cash Fixed asset spending / Depreciation higher may reveal long term planning, but needs to cover at least 3 years