The Ratios
W e can simply make a list of the ratios we can use here but it's
much better to put them into different categories.
 Liquidity ratios
 Financial leverage ratios
 Asset management ratios
 Profitability ratios
Users of Accounting Information
 Investors
 Lenders
 Managers of the organization
 Employees
 Suppliers and other trade creditors
 Customers
 Governments and their agencies
 Public
 Financial analysts
1-Liquidity ratios
The two liquidity ratios, the current ratio and the acid test ratio, are
the most important ratios in almost the whole of ratio analysis are
also the simplest to use and to learn. W hich give a picture of a
company‘s short term financial situation or solvency.
a) Current ratios
The current ratio is the primary measu re of a company’s liquidity.
That is its ability to meet its financial obligations in the near future.
Current Ratios
Intel
Dec 31 2006
CA/CL
1.97
AMD
Dec 31 2006
-
1.4
Intel
Quarter 1 2007
-
2.7
AMD
Quarter 1 2007
-
1.2
At year end of 2006, current assets for Intel were 71% more then
AMD over current liabilities.
At the end of Q1’2007, current assets for Intel were 44% more then
AMD over current liabilities.
b) The Acid Test Ratio
The acid test ratio is also known as the liquid or the quick ratio. The
idea behind this ratio is that stocks are sometimes a problem
because they can be difficult to sell or use. That is, even though a
supermarket has thousands of people walking through its doors
every day, there are still items on its shelves that don't sell as
quickly as the supermarket would like. Similarly, there are some
items that will sell very well.
Acid Test Ratio
Intel
Dec 31 2006
CA-Inventory/ CL
1.5
AMD
Dec 31 2006
-
1.104
Intel
Quarter 1 2007
-
2.01
AMD
Quarter 1 2007
-
0.77
At the end of year 2006, t he quick ratio tells us that Intel has 74%
more in cash and near cash asset for every $1 in current liabilities.
At the end of Q1’2007, the quick ratio tells us that Intel has 38%
more in cash than AMD.
Ideally this figure should also be above 1 for the firm to be
comfortable. That would mean that they can meet all their liabilities
without having to sell any of their stock. This would make potential
investors feel more comfortable about their liquidity. If the figure is
far below 1 they may begin to get worried about the firm's ability to
meet its debts.
2-Financial leverage Ratios
Debt management deals with how the firm uses other people’s
money to its own advantage.
3-Asset management ratio
The asset management ratios are also kno wn as working capital
ratios or the efficiency ratios. The aim is to measure how effectively
the firm is managing its assets. These ratios are designed to answer
this question: does the total amount of each type of asset as
reported on the balance sheet se em reasonable, too high, or too low
in view of current and projected sales levels? If the company has
too many assets, its cost of capital will be too high hence its profit
depressed. On the other hand, if asset are too low, profitable sales
will be lost.
a) Inventory turnover ratio
It measures approximately the number of times an entity is able to
acquire the inventories and convert them into sales.
Inventory turnover Ratio
Intel
Dec 31 2006
Sales / inventory
1.03
AMD
Dec 31 2006
-
3.51
Intel
Quarter 1 2007
-
1.012
AMD
Quarter 1 2007
-
0.94
At the end of year 2006 , Inventory Turnover Ratio for the AMD is
above as compared to the Intel and shows that the firm is selling
their inventory quickly. Inventories are typically the least liquid of a
firm’s current assets; hence they are the assets on which losses are
most likely to occur in the event of liquidation. Therefore, a measure
of the firm’s ability to pay off short -term obligations without relying
on the sale of inventories is important.
At the end of Q1’2007, inventory turnover ratio for the Intel is more
than AMD
c) Fixed Asset Turnover Ratio
The total asset turnover matches the turnover of a business with all
of the assets it has used to generate that turnover - the bigger the
value of the ratio the better. It tells us how effectively the firm is
using its fixed assets to generate sales.
Fixed asset turnover Ratio
Intel
Dec 31 2006
Sales / net fixed
2.407
assets
AMD
Dec 31 2006
-
0.72
Intel
Quarter 1 2007
-
0.25
AMD
Quarter 1 2007
-
0.2
For each dollar Intel has invested in fixed assets, it is able to earn
$2.407 in sales revenue that is more than $0.72 of AMD in year
ended 2006.
For each dollar Intel has invested in fixed assets, it is able to earn
$0.25 in sales revenue that is more than $0.2 of AMD in Q1’2007.
d) Total Asset Turnover Ratio
Total Asset Turnover Ratio measures turnover of all the firms’
assets greater this ratio means firm in better position and using their
assets effectively and efficiently.
Total asset turnover Rat io
Intel
Dec 31 2006
Sales / total assets
0.091
AMD
Dec 31 2006
-
0.217
Intel
Quarter 1 2007
-
0.09
AMD
Quarter 1 2007
-
0.07
This ratio shows that Intel is able to generate 0.091 in revenue for
each dollar invested in the company’s assets for the y ear 2006 that
is less than AMD. Intel is able to generate 0.09 in revenue for each
dollar invested in the company’s asset for the Q1’2007 that is more
than AMD.
Total asset turnover ratio is below from the previous year .sales
should
be
increased,
some
as sets
should
be
disposed
or
combination of these steps should be taken
4-Profitability Ratios
Measures the degree to which the business is profitable. The
common profitability ratios include return on common equity, return
on total assets, basic earning p ower and profit margin on sales.
Return on common equity measures the return on funds invested by
the owners of the business. Return on total assets measures how
efficiently profits are being generated from assets employed in the
business. Return on sales or net profit margin is a measure of
overall business success. Generally, the larger (more positive) the
ratio, the more prof itable the business.
a) Profit Margin Ratio
The gross profit margin ratio tells us the profit a business makes on
its sales.
Profit margin Ratio
Intel
Dec 31 2006
Net income / sales
29%
AMD
Dec 31 2006
-
-6%
Intel
Quarter 1 2007
-
37%
AMD
Quarter 1 2007
-
-69%
This ratio gives the profit per dollar of sales. AMD is in loss as
compared to Intel which has profit of 29% in year ended 2006. Intel
has 37% profit per dollar of sales in Q1’2007. AMD is loss of 69% in
Q1’2007.
b) Basic Earning Pow er
Basic earning power Ratio
Intel
Dec 31 2006
EBIT / total assets
0.03
AMD
Dec 31 2006
-
0.038
Intel
Quarter 1 2007
-
0.035
AMD
Quarter 1 2007
-
-0.038
This ratio shows the raw earning power of the firm’s assets, before
the influence of taxes and leverage, and it is useful for comparing
firms with different tax situations and different degrees of financial
leverage Because of its low turnover ratios in Q1’2007; AMD is
earning loss on its assets.
c) Return on total Asset
Return on total assets Ratio
Intel
Dec 31 2006
Net income / total
0.027
assets
AMD
Dec 31 2006
-
-0.0126
Intel
Quarter 1 2007
-
0.034
AMD
Quarter 1 2007
-
-0.05
This ratio shows the analyst that Intel is able to generate 2.7% in
net income for each dollar invested in the company’s assets for the
year 2006. AMD negative 5% return is well below Intel’s 3.4% for
the Q1’2007.
d) Return on Common Equity
Return on Common Equity Ratio
Intel
Dec 31 2006
Net income /
0.036
common equity
AMD
Dec 31 2006
-
-0.03
Intel
Quarter 1 2007
-
0.044
AMD
Quarter 1 2007
-
-0.12
This ratio shows the analyst that Intel is able to generate 3.6 % of
net income for each dolla r invested in the common equity for the
year 2006.Intel earned 4.4% in Q1’2007 on the investment . AMD has
generated loss of 3% in year 2006 and 12% loss in Q1’2007 .