Ratios

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Liquidity/Solvency & Operational

1. Financial Statement Ratio Analysis:

2. 4 major purposes/types of measures being analyzed are:

1) Operational Activity (CA) ]

2) Liquidity/Solvency (A&L) ] B/S

3) Equity/Investment Leverage (E) ]

4) Profitability (NI) I/S

3. Big picture:

-----> how B/S & I/S relationship tie together

-----> ROA vs. ROE

4. Liquidity/Solvency Ratio: ----> Firm's ability to pay obligations as they come due.

1) WC

2) WC Ratio or Current Ratio

----> Current Ratio = CA/CL

1) interpretation:

a)=1.25, for every dollar of CL, we have 1.25 dollar of CA

b)=0.8, for every dollar of CL, we have 0.8 dollar of CA

2) note: WC >0 is not necessary a good thing, because CA > CL might be due to the

cumulative of A/R.

3) Quick/Acid Ratio

---> ( cash + net receivables + marketable securities ) / CL

4) Securities defensive-inverval ratio

---> ( ) / Ave. daily cash expenditures

5) Times Interest earned ratio

---> (NI + Int. Exp. + Income tax) / Int. Exp.

6) Times Preferred dividend earned ratio

---> NI/ Annual preferred dividend obligation

5. Operational Ratio: ---> Firm's operation efficiency

1) A/R turnover

---> Net Credit Sales/ Ave. net A/R

1.1) # of days' sales in A/R

---> ave. # of days required to collect receivables

2) Inventory turnover

---> COGS / Ave. Inventory

----> it indicates over or under stocking of inventory or obsolete inventory

2.1) # of days' supply in inventory

---> ave. # of days inventory is held before it is sold or used. It indicates the

efficiency of general inventory management

3) Operating number of cycle (Days in Operating)

----> = ( # of days' sale in A/R ) + (length cycle number of days' supply in inventory)

---> measures the ave. length of time to invest cash in inventory, covert the

inventory to receivable, and collect the receivables; it measures the time to go

from cash back to cash.

Points to be addressed:

1. Beg. Inventory + purchase = COGS + End. Inventory

--> COGS = Beg. + purchase - End.

--> Beg. = COGS + End. - Beg.

2. Inventory turnover = COGS/Ave. Inventory

3. Be careful of the data (which is ending inventory or beginning inventory)

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Equity & Profitibility

1. Profitability Ratios: ------> these measures the aspects of a firm's operating (income/loss) on a relative basis.

1) Profit Margin (on sales)

a. = NI/ net Sales

b. measures net profitability on sales (rev.)

2) ROA

a. = [NI + Int. Exp. (NOT) ] /Ave. total assets

b. measures the rate of return on total assets; it indicates the efficiency with which the invested resources are used (independent of financing)

3) ROE

a. = [NI -Preferred div. (CY's obligation only)]/ Ave. common stockholders' equity

b. measures the rate of return on common shareholders' investment

4) Return on owners' equity

a. = NI / Ave. stockholders' equity

b. measures the rate of return on all stockholders' investment

5) EPS (Basic) ------> Earnings per share of Common Stock

a. = [NI - preferred divi. (CY's obligation only)]/ WA. # of O/S C/S

b. income earned per share of C/S. It indicates the ability to pay dividends to common shareholders

6) PE ratio

a.= P/EPS

b. measures the price of a share of C/S relative to its latest EPS (earning per share of

C/S)

7) C/S dividend pay out ratio

a. total basis = cash dividends to common shareholders / NI to common shareholders

8) Per share basis

a. measures the extend (%) of earnings distributed to C/S holders

b. = (cash div. per C/S) / EPS

9) Common Stock yield

a. measures the rate of return (yield) per share of C/S

b. (Div. per C/S) / (market price per C/S)------> (Div. per C/S)/ P

2. Equity/Investment Leverage ratio -----> These provide measures of relative sources of equity and equity value

1) D to E ratio:

a. measures relative amount of assets provided by creditors and shareholders

b. = Total liabilities/ total shareholders' Equity

2) Owners' equity ratio:

a. measures the proportion of assets provided by shareholders

b. = Total Owners' equiyt/ total assets

3) Debt ratio:

a. measures the proportion of assets provided by creditors

b. = Total liabilities/ total assets

4) BV per common share

a. measures the per share amount of common shareholders' claim to assets

b. = common shareholders' equity/ # of O/S common shares

5) BV per preferred share

a. measures the per share amount of preferred shareholders' claim to assets

b. = preferred shareholders' equity/ # of O/S preferred shares

3. Points to be addressed.

1) Return on common stockholders' equity measures the ROR on common stockholders' investment

vs.

2) common stock yield measures the ROR (yield) per share of common stock.

---> The rate of return earned by common shareholders is measured by common stock yield

3) Q4: BV per share of C/S, in this case, it's total stockholders' equity (= C/S + APIC-C/S + R/E - T/S)

4) ROR on assets = NI/total assets