LO3
Ratio Analysis 3.3
• Ratios also allow for better comparison
through time or between companies
• As we look at each ratio, ask yourself what
the ratio is trying to measure and why is
that information important
• Ratios are used both internally and
externally
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Categories of Financial Ratios
• Short-term solvency or liquidity ratios
• Long-term solvency or financial leverage
ratios
• Asset management or turnover ratios
• Profitability ratios
• Market value ratios
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LO3
Computing Liquidity Ratios
• Current Ratio = CA / CL
• 1,801,690 / 1,780,785 = 1.01 times
• Quick Ratio = (CA – Inventory) / CL
• (1,801,690 – 388,947) / 1,780,785 = .793
times
• Cash Ratio = Cash / CL
• 3,171 / 1,780,785 = .002 times
• Cash means cash + cash equivalents
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LO3
Computing Long-term Solvency
Ratios
• Total Debt Ratio = (TA – TE) / TA
• (4,931,444 – 1,761,044) / 4,931,444 = .6429
times or 64.29%
• The firm finances a little over 64% of its assets
with debt.
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LO3
Long-Term Solvency Ratios
continued
• Debt/Equity = TD / TE
• (4,931,444 – 1,761,044) / 1, 761,044 = 1.800
times
• Equity Multiplier = TA / TE = 1 + D/E
• 1 + 1.800 = 2.800
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LO3
Computing Coverage Ratios
• Times Interest Earned = EBIT / Interest
• 820,183 / 52,841 = 15.5 times
• Cash Coverage =
(EBIT + Depreciation) / Interest
• (820,183 + 362,325) / 52,841 = 22.38 times
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LO3
Computing Inventory Ratios
• Inventory Turnover =
Cost of Goods Sold / Inventory
• 1,762,721 / 388,947 = 4.53 times
• Days’ Sales in Inventory =
365 / Inventory Turnover
• 365 / 4.53 = 81 days
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LO3
Computing Receivables Ratios
• Receivables Turnover =
Sales / Accounts Receivable
• 4,335,491 / 1,095,118 = 3.96 times
• Days’ Sales in Receivables =
365 / Receivables Turnover
• 365 / 3.96 = 92 days
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LO3
Computing Total Asset Turnover
• NWC Turnover = Sales / NWC
• 4,335,491 / (1,801,690 - 1,780,785) = 207.390
times
• Fixed Asset Turnover = Sales / Net Fixed
Assets
• 4,335,491 / 3,129,754 = 1.385 times
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LO3
Asset Turnover Ratios continued
• Total Asset Turnover =
Sales / Total Assets
• 4,335,491 / 4,931,444 = .88 times
• Measure of asset use efficiency
• Not unusual for TAT < 1, especially if a firm
has a large amount of fixed assets
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LO3
Computing Profitability
Measures
• Profit Margin = Net Income / Sales
• 471,916 / 4,335,491 = .1088 times or 10.88%
• Return on Assets (ROA) =
Net Income / Total Assets
• 471,916 / 4,931,444 = .0957 times or 9.57%
• Return on Equity (ROE) =
Net Income / Total Equity
• 471,916 / 1,761,044 = .2680 times or 26.8%
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Computing Market Value
Measures
LO3
•
•
•
•
Market Price of Stock = $60.98 per share
Shares outstanding = 205,838,910
Market Value of LTD = $1,461,874,980
EPS = Net Income / Shares Outstanding
• 471,916,000 / 205,838,910 = 2.29
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LO3
Market Value Measures Continued
• PE Ratio = Price per share / Earnings per
share
• 60.98 / 2.29 = 26.6 times
• PEG Ratio = PE ratio / expected earnings
growth rate
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LO3
Market Value Ratios continued
• Market-to-book ratio = Market Value Per
Share / Book Value Per Share
• 60.98 / (1,761,044,000 / 205,838,910) = 7.1
times
• Enterprise Value (EV) / EBITDA =
(Market Value of Equity + Market Value of
Debt + Preferred Shares + Minority Interest
– Cash & Equivalents) / EBITDA
• (60.98 x 205,838,910 + 1,461,874,980 –
3,171,000) / (820,183,000 + 362,325,000) =
11.85 times
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LO3
Table 3.8 – Common Financial
Ratios
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Table 3.8 – Common Financial
Ratios
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