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 .