Additional Ratios
(from textbook, Appendix 4B,
and other sources)
1
Analyzing the Financial Statements
Comparisons across time
 Comparisons within the industry
 Comparisons within the financial
statements:

– Common-size statements
– Ratio analysis
2
Comparisons Within the Industry

Financial accounting numbers can also be
made more meaningful if they are compared
to those of similar companies.
 Comparison of financial accounting numbers
with industry averages is also helpful.
 Sources of industry information include:
– Dun & Bradstreet
– Robert Morris Associates
– Moody
– Standard & Poor
3
Comparisons Within
the Financial Statements

Common-size financial statements
– Common size income statement (where all
other components are expressed as a
percentage of sales or revenues) allows for
comparisons across time and across
companies.
4
Common-Size Income Statement
for La-Z-Boy, Inc.
Income Statement (in millions)
2003 %
Net sales
$2,112 100
Cost of sales
(1,617) 77
Expenses and charges
(459) 21
Net income
$ 36
2
2002
%
$2,154 100
(1,692) 79
(400) 18
$ 62
3
On the income statement, cost of goods sold,
expenses, and net income are often expressed
as percentages of net sales.
On the balance sheet, assets and liabilities can
be expressed as percentages of total assets.
5
Comparisons Within
the Financial Statements

Ratio analysis allows for measures of
specific activities of a company.
–
–
–
–
Profitability ratios
Long-term solvency ratios
Short-term Liquidity ratios
Asset turnover ratios
6
Profitability Ratios
These ratios are designed to measure a
firm’s earnings power.
 Net income, the primary measure of the
overall success of a company, is
compared to other measures of financial
activity or condition to assess
performance as a percent of some level
of activity or investment.

7
Profitability Ratios
Return on
Equity
Net Income
Average Equity
This ratio measures the effectiveness at
managing capital provided by the owners.
8
Profitability Ratios
Return on
Sales
Net Income
Net Sales
This ratio provides an indication of a company’s ability
to generate and market profitable products/services
and control its costs; also called the Profit Margin.
9
Long-term Solvency Ratios
Solvency examines the ability of a
company to meet all of its debt
obligations.
 Solvency ratios consider the
relationship between debt and other
components of the financials (assets
and equity)
 Solvency ratios also measure the ability
of the company to meet its interest
obligation.

10
Solvency Ratios
Capital
Structure
Leverage
Average Total Assets
Average Equity
This ratio measures the extent to which a company
relies on borrowings (liabilities).
11
Solvency Ratios
Debt to Equity
Ratio
Average Total Liabilities
Average Equity
This ratio compares liabilities to stockholders’
equity and is another measure of capital structure
leverage.
12
Solvency Ratios
Interest
Coverage
Net Income + Tax Expense + Interest Expense
Interest Expense
This ratio compares the annual funds available to meet
interest to the annual interest expense.
13
Solvency Ratios
Accounts
Payable
Turnover
Cost of Goods Sold
Average Accounts Payable
This ratio measures the extent to which accounts
payable is used as a form of financing.
14
Liquidity Ratios
Liquidity refers to a company’s ability to
meet its current debts as they come
due.
 There is pressure on companies with
high levels of leverage to manage their
liquidity.

15
Liquidity Ratios
Current
Ratio
Current Assets
Current Liabilities
This ratio measures solvency in the sense that current
assets can be used to meet current liabilities.
16
Liquidity Ratios
Quick
Ratio
Cash + Marketable Securities + A/R
Current Liabilities
Similar to the current ratio, this ratio provides a more
stringent test of a company’s liquidity.
17
Asset Turnover Ratios
Asset turnover ratios are typically
computed for total assets, accounts
receivable, inventory, and fixed assets.
 These ratios measure the speed with
which assets move through operations
or reflect the number of times during a
given period that these specific assets
are acquired, used, and replaced.

18
Asset Turnover Ratios
Receivables
Turnover
Net Credit Sales
Average Accounts Receivable
This ratio reflects the number of times the trade
receivables were recorded, collected, and recorded
again during the period.
Days outstanding is an alternative measure.
19
Asset Turnover Ratios
Inventory
Turnover
Cost of Goods Sold
Average Inventory
This ratio measures the speed with which
inventories move through operations.
Days outstanding is an alternate measure.
20
Asset Turnover Ratios
PPE
Turnover
Sales
Average PPE
This ratio measures the speed with which assets
related to property, plant and equipment are used
up.
21
Asset Turnover Ratios
Total Asset
Turnover
Sales
Average Total Assets
This ratio measures the speed with which all assets
are used up in operations.
22