1. Chapter 2 Financial Ratio Analysis

2. 2-2 Example 2.1 Problem  Rylan Enterprises has 5 million shares outstanding.  The market price per share is $22.  The firm’s book value of equity is $50 million.  What is Rylan’s market capitalization?  How does the market capitalization compare to Rylan’s book value of equity?

3. 2-3 Example 2.1 Solution  Rylan’s market capitalization is $110 million 5 million shares × $22 share = $110 million. The market capitalization is significantly higher than Rylan’s book value of equity of $50 million.

4. 2-4 2.2 Balance Sheet (cont'd) Balance Sheet Analysis  Market-to-Book Ratio Value Stocks  Low M/B ratios Growth stocks  High M/B ratios

5. 2-5 2.2 Balance Sheet (cont'd) Balance Sheet Analysis  Debt-Equity Ratio Measures a firm’s leverage Using Book Value versus Market Value

6. 2-6 2.2 Balance Sheet (cont'd) Other Balance Sheet Information  Current Ratio Current Assets / Current Liabilities  Quick Ratio (Current Assets – Inventories) / Current Liabilities

7. 2-7 2.3 Income Statement (cont'd) Income Statement Analysis Gross Margin = Gross Profit / Total Sales Operating Margin Net Profit Margin

8. 2-8 2.3 Income Statement (cont'd) Asset Turnover = Total Revenue / Total Assets Accounts Receivable Days

9. 2-9 2.3 Income Statement (cont'd)  Interest Coverage Ratios EBIT / Interest Expense Operating Income / Interest Expense EBITDA / Interest Expense

10. 2-10 2.3 Income Statement (cont'd)  Investment Returns ROA  Net Income / Total Assets ROE  Valuation Ratios P/E Ratio