1. ©2012 McGraw-Hill Ryerson Limited 1 of 34 Learning Objectives 1.Calculate 13 financial ratios that measure profitability, asset utilization, liquidity and debt utilization. (LO1) 2.Assess a company’s source of profitability using the DuPont system of analysis. (LO2) 3.Examine the ratios in comparison to industry averages. (LO3) 4.Examine the ratios and company performance by means of trend analysis. (LO4)

2. ©2012 McGraw-Hill Ryerson Limited 2 of 34 Saxton Company Industry Average 3-4a. Receivables turnover = = 11.410 times 3-4b. Average collection period = = 32 36 days 3-5a. Inventory turnover = Cost of Goods Sold = 8.17 times Inventory Sales (credit) Receivables $4,000,000 $350,000 Accounts receivable Average daily credit sales $350,000 $10,959 $3,000,000 $370,000 Asset utilization ratios(a) LO1 and LO3

3. ©2012 McGraw-Hill Ryerson Limited 3 of 34 Saxton Company Industry Average 3-5b. Inventory holding period = = 4552 days 3-6a. Accounts payable turnover = = 60.0 12 times 3-6b. Accounts payable period = Accounts payable = 630 days Average daily purchases (COGS) Inventory Average daily COGS $370,000 $8,219 Cost of goods sold Accounts payable $3,000,000 $50,000 $8,219 Asset utilization ratios(b) LO1 and LO3

4. ©2012 McGraw-Hill Ryerson Limited 4 of 34 Asset utilization ratios(c) Saxton Company Industry Average 3-7. Capital asset turnover = = 5.05.4 times 3-8. Total asset turnover = = 2.5 1.5 times Sales Capital assets $4,000,000 $800,000 Sales Total assets $4,000,000 $1,600,000 LO1 and LO3

5. ©2012 McGraw-Hill Ryerson Limited 5 of 34 Liquidity ratios Saxton Company Industry Average 3-9. Current ratio = = 2.672.1 3-10. Quick ratio = = 1.43 1.0 Current assets Current liabilities $800,000 $300,000 Current assets – Inventory Current liabilities $430,000 $300,000 LO1/LO3

6. ©2012 McGraw-Hill Ryerson Limited 6 of 34 Debt utilization ratios Saxton Company Industry Average 3-11. Debt to total assets = = 37.5%33% 3-12. Times interest earned = = 11 7 times 3-13. Fixed charge coverage = = 65.5 times Total debt Total assets $600,000 $1,600,000 Income before interest and taxes Interest $550,000 $50,000 Income before fixed charges and taxes Fixed charges $600,000 $100,000 LO1/LO3

7. ©2012 McGraw-Hill Ryerson Limited 7 of 34 Table 3-2a Ratio analysis(a) Saxton Industry Company AverageComparison A. Profitability 1.Profit margin……………… 5% 6.5%Below average 2.Return on assets………..…. 12.5% 10% Above average due to high 8 3.Return on equity…………. 20% 15% Good due to ratios 2 and 11 B. Asset Utilization 4a.Receivables turnover ……... 11.4 10.0 Good 4b.Average collection period…. 32.0 36.0 Good 5a.Inventory turnover ………... 8.1 7.0 Good 5b.Inventory holding period...... 45 52 Good 6a.Accounts payable turnover... 60 12 Good 6b.Accounts payable period...... 6 30 Good 7.Capital asset turnover ……. 5.0 5.4 Below average 8.Total asset turnover ………. 2.5 1.5 Good LO3

8. ©2012 McGraw-Hill Ryerson Limited 8 of 34 Table 3-2b Ratio analysis(b) LO3 Saxton Industry Company AverageComparison C. Liquidity 9.Current ratio …………… 2.672.1Good 10.Quick ratio ……………….. 1.431.0Good D. Debt Utilization 11.Debt to total assets ……….. 37.5% 33%Slightly more debt 12.Times interest earned ……. 117Good 13.Fixed charge coverage …… 65.5Good

9. ©2012 McGraw-Hill Ryerson Limited 9 of 34 Techniques of Ratio Analysis 1.DuPont Analysis 2.Comparative Analysis 3.Trend Analysis 4.Common-Size Statements LO1/LO2/LO3/LO4

10. ©2012 McGraw-Hill Ryerson Limited 10 of 34 Comparative vs. Trend Analysis Ratios on their own do not mean a lot Comparing a company’s ratios to those of its industry or its competitors is comparative analysis and may reveal what ratios are out of line with certain standards Comparing the same company’s ratios over a number of years is trend analysis and may reveal whether ratios are improving or worsening LO3 and LO4

11. ©2012 McGraw-Hill Ryerson Limited 11 of 34 Table 3-3 Trend analysis of competitors 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0.7918.00.8119.8 0.6013.80.7416.4 0.5613.40.7615.5 0.7116.40.7316.8 0.8718.10.6615.7 0.8114.50.7217.1 0.8317.70.8821.4 0.5813.90.9022.1 0.5013.00.6318.1 0.41 9.90.5911.9 Return on Assets Return on Equity Royal Bank Bank of Montreal Return on Assets Return on Equity Source: Bank of Montreal annual reports www.bmo.com Royal Bank of Canada annual reports www.rbcroyalbank.com LO3 and LO4

12. ©2012 McGraw-Hill Ryerson Limited 12 of 34 Figure 3-2 Trend analysis LO3 and LO4