principles of
corporate
finance
Chapter 4b
Lecturer
Sihem Smida
Analyzing and interpreting
Financial statement
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Ratio Analysis
Financial ratios are relationships
determined from a firm’s financial
information.
Used to compare and investigate
relationships between different pieces of
financial information, either over time or
between companies.
Ratios eliminate the size problem.
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Categories of Financial Ratios
Liquidity—measures the firm’s short-term
solvency.
Capital structure—measures the firm’s ability
to meet long-run obligations (financial
leverage).
Asset management (turnover)—measures the
efficiency of asset usage to generate sales.
Profitability—measures the firm’s ability to
control expenses.
Market value—per-share ratios.
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Liquidity Ratios
Current assets
Current ratio 
Current liabilitie s
Current assets  Inventory
Quick ratio 
Current liabilitie s  Bank overdraft
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Capital Structure Ratios
Total financial debt  Cash
Total equity  Intangible s
Total debt
Debt/equit y ratio 
Total equity
Total assets
Equity multiplier 
Total equity
EBIT
Net interest cover 
Interest  finance charges
Interest - bearing debt
Debt to gross cash flow 
Net profit after tax  depreciati on  amortisati on
Net debt/equit y ratio 
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Turnover Ratios
Cost of goods sold
Inventory turnover 
Inventory
365 days
Days' sales in inventory 
Inventory turnover
Sales
Receivable s turnover 
Accounts receivable
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Turnover Ratios (continued)
365 days
Days' sales in receivable s 
Receivable s turnover
Sales
Fixed asset turn over 
Non - current assets
Sales
Total asset turn over 
Total assets
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Profitability Ratios
Profit margin 
Net profit
Sales
Net profit
Return on assets (ROA) 
 100%
Total assets
EBIT
Return on investment 
100%
Total assets
Return on equity (ROE) 
Net profit
 100%
Total equity
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Market Value Ratios
Price per share
Price/earn ing ratio 
Earnings per share
Market val ue per share
Market - to - book ratio 
Book value per share
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The Du Pont Identity
Breaks ROE into three parts:
– operating efficiency
– asset use efficiency
– financial leverage
ROE 
Net profit Sales Assets


Sales
Assets Equity
 Profit margin  Total asset turn over  Equity multiplier
 ROA  Equity multiplier
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Uses for Financial Statement Information
Internal uses:
– performance evaluation
– planning for the future
External uses:
– evaluation by outside parties
– evaluation of main competitors
– identifying potential takeover targets