1. Financial Ratio Analysis
How can published financial statements be used to assess financial performance?

2. Financial Ratio Types Market Value Profitability Asset Activity
Leverage
Liquidity

3. Market Value Ratios Examples: Market-to-Book; Price-Earnings
Questions: How do securities markets value the company’s assets? Earnings?

4. Profitability Ratios
Examples: Return on assets, equity, invested capital; gross, net profit margin
Questions: How profitable is the company per dollar invested in the business; per dollar of sales?

5. Asset Activity Ratios
Examples: asset turnover, average collection period, inventory conversion period, payables deferral period
Questions: How efficiently does the company use its assets? How long does it take assets or liabilities to turn into cash?

6. Leverage Ratios Examples: Debt/assets; Debt/equity; Interest coverage
Questions: How much of a burden does debt pose relative to assets, equity or cash flow? How risky is the company?

7. Liquidity Ratios
Examples: Current ratio, quick ratio, interval measure
Questions: How easily can the company meet its immediate cash requirements? How risky is the company?

8. Financial Ratios Relative to What?
By themselves, financial ratios have no meaning. We need to compare to:
Past data for the same company
Data for similar companies (e.g., same industry)
Other ratios (i.e., DuPont ratios, Cash Conversion Cycle)

9. A Good Source of Company Ratios
                                                    
A Good Source of Company Ratios

10. Dell and Gateway: Margin Trends
2005
2004
2003
2002
2001
2000
1999
1998
1997
Dell
Gross Margin
18.6
18.2
17.9
17.7
20.2
20.7
22.5
22.1
21.5
Net Margin
6.6
6.4 6 4
6.8 8
7.7
6.7
Gateway
9.1
13.6
14.1
21.4
20.5
18.3
17.1
Net margin
0.5
-15.1
-7.1
-17.4
2.5
4.8
4.5
1.7 5

11. Dell, Gateway and Computer Hardware
Industry
Gross Margin
18.6
9.1
31.1
Net Margin
6.6
0.5
7.2
Asset Turnover
2.4
2.1
1.5
Inventory Turnover
91.6
16.4 45
Rec. Turnover
12.6
11.9
8.6
ROIC
40.8
3.2
19.6
ROE
58.4
44.4
31.9
Quick Ratio
0.9
0.8
1.3
Mkt/Book
13.6
3.7
6.9

12. DuPont Ratios Net Income x Sales x Assets = Net Income
Sales Assets Equity Equity
Net profit X Asset x Equity = ROE
margin turnover multiplier

13. DuPont Analysis: Selected Companies
ROE
S/A
NI/S
A/E
Burlington Northern Santa Fe
0.138
0.128
0.337
3.219
Citicorp
0.165
0.102
0.114
14.121
Consolidated Edison
0.113
0.495
0.098
2.340
Merck
0.375
0.943
0.195
2.038
Safeway
0.334
3.203
0.025
4.209
Wal-Mart Stores
0.198
2.776
0.030
2.384

15. Cash Conversion Cycle: Selected Companies
Company
Inv. Conv.
Ave. Coll.
Op. Cycle
Pay. Def.
Cash Conv.
Hewlett-Packard
89.8
65.1
154.9
65.9 89
Merck 70
42.7
112.7 66
46.7
Boeing
74.1 22
96.1
54.4
41.7
Wal-Mart Stores
64.4
2.8
67.2
37.4
29.8
Safeway
33.9
36.7
35.3
1.4
American Airlines
15.1
24.7
39.8
70.9
-31.1
McDonald's
3.9
7.1 11
62.2
-51.2