Gauge of company performance/strength * Investment analysts are primarily interested in financial statements as a predictor of future performance * Lenders will primarily focus on the financial strength (default risk)
Financial Ratios
Margin Ratios
Gross profit margin = (Revenue – COGS) / Revenue
Net profit margin = Net profit after taxation / Revenue Should minority interest be added back to profit?
Net operating margin = Net profit before interest and tax / Revenue
Return on Investment Ratios
Return on capital employed (ROCE) = net profit / share capital + reserves + long-term liabilities Shows how much a company has earned on invested long-term funds.
Return on equity (ROE) = net profit / share capital + reserves Measures how much a company has earned on the funds invested by its shareholders.
Return on assets (ROA) = Net profit after tax + (interest x (1- tax rate))/ Total assets Shows how well a company’s funds were used, irrespective of the relative magnitudes of the sources of these funds
Earnings per share (EPS) = net profit / number of shares Diluted EPS includes potential shares (convertible bonds etc.)
Price to earnings (P/E) ratio = market price per share / EPS Reflects how the market judges the company’s growth expectations.
* Inventory turnover = cost of sales / average inventory How many times a company's inventory is sold and replaced over a period Divide 365 by the answer to get the ‘average days inventory outstanding’
Solvency Ratios
Solvency refers to the long-term ability to generate cash internally or from external sources in order to meet long-term financial obligations
* Gearing ratio = Long-term liabilities / Capital employed
How dependent is a firm on borrowing? How much is it leveraged? More leverage is associated with more risk. Leverage
Chapter 8: Accounting Equations and Financial Statements Assets = Liabilities + Owners equity Basis of a balance sheet Profit = Revenue – Expenses Activities described on an income statement Cash flow = Receipts – Disbursements Basis of each cash flow statement Owners equity = Assets – Liabilities What you have = What you own – What you owe Income statement a financial statement that shows the revenue and expenses of a firm, allowing you to calculate the profit or loss produced in a specific…
Ratio and Financial Statements Analysis Kimberly Y. Gruber University of Maryland University College Dr. Sunando Sengupta 07/25/2013 Turnitin Score: 23% Executive Summary The purpose of this paper is to examine ratio and financial statement analysis. Such analysis is a useful tool for managers and stakeholders to evaluate a company’s financial health in order to identify opportunities for growth and areas of weakness so as to institute corrective measures. Financial statements are used…
Return on Investment 4 Long-Term Solvency 5 Market Ratios There are 5 categories to measure and 10 ratios to select. That is an average of about two ratios per category The 10 ratios below are those I would pick if I was asked for the 10 most significant ratios. Ten Key Ratios Short-term Liquidity 1 Quick Ratio Profitabilty 2 Average Annual Revenue…
Ratios are determined by dividing one number by another, and are usually expressed as a percentage. They enable business owners to examine the relationships between seemingly unrelated items and thus gain useful information for decision-making. "They are simple to calculate, easy to use, and provide a wealth of information that cannot be gotten anywhere else," James O. Gill noted in his book Financial Basics of Small Business Success. But, he added, "Ratios are aids to judgment and cannot take the…
3. Introduction to Financial Ratios Financial ratios are dealings determined from a firm's financial information and used for comparison purposes in financial means. Some of the financial ratios are Profitability ratios, Liquid ratios, Capital structure ratios, Assets management ratios and Market value ratios. Sub-categories of these ratios are defined below. 3.1 Profitability Ratios A category of financial metrics used to evaluate a business's ability to generate profit as compared to its expenses…
Liquidity ratios are the measure of how company pays its short term obligations and to meet the needs of the cash. The simplest ratio is the current ratio. This ratio expresses the relationship between current assets and current liabilities. The comparison of the ratio shows that for both 2009 and 2010, industry average is better than the brands Inc. There is also a decrease in the current ratio for both the industries. The decrease of value from 1.8 to 1.75 is not favorable for the company…
EXXON Financial Ratios FIN/370 Exxon Mobile started their business in 1859 in Titusville Pennsylvania, being in business for over 125 years it makes them one of the first big oil corporations in the US. The multi-billion dollar company currently operates in an international level around the world. The oil industry is a billion dollar industry which is highly competitive in the market, but Exxon has been able to stay highly active and competitive within the industry. Exxons financial…
Liquidity Ratios University of Phoenix Fin-370 Caleb D. González, José Edwin Ortiz, Luis Maymi, José Berrios Prof. Emanuel Santiago Pérez abril 27, 2015Financial Liquidity Analysis General Electric is a powerful electrical distributor that supplies residential, industrial and commercial sectors. General Electric has been in business for over 125 years with a motto that reflects why they have been so successful for so long. Beginning with their incandescent lamp and evolving their product offering…
There are a few vital ratio groupings that a potential investor should investigate before buying, selling, or holding. We have broken the ratios down to five groups which give you the best information on a company. The first one is short term liquidity which is defined as the ability of the company to be in business in a year. Long term solvency is the amount of debt the company can have and if it can handle the debt. Asset management is measured on how well the company manages their assets. Profitability…
it is more volatile than the market. YCHARTS.com calculated Dillard’s β at 1.86 meaning that Dillard’s stock is 80% more volatile than the market. Over the past three years, it can be observed that Dillard’s has been slowly increasing its debt ratio; however the firm is still standing in good health. When we judge…
