PERFORMANCE & PROFITABILITY
MEASURES
Uses of Financial Numbers
 Firms provide goods and services using assets that
funded
 Debt
 Equity
 Mix of Debt and Equity = Capital Structure
 Debt/Equity Ratio
 Debt/(Debt + Equity) = Financial Leverage
 Leverage magnifies performance
 How efficiently is management using the assets?
 How profitable is the firm?
Short-Term Solvency
 Short-Term Solvency and Liquidity Measures
 Current Ratio = Current Assets/Current Liabilities
 Quick Ratio = (Current Assets – Inventory)/Current
Liabilities
 Cash Ratio = Cash / Current Liabilities
 Net Working Capital = Current Assets – Current Liabilities
 Net Working Capital/Total Assets
 Average Daily Operating Cost = (Total Cost for Year excluding
Depreciation and Interest)/365
 Suppose there is a strike and cash inflows dry up, how many days
can the company operate?
Interval Measure = Current Assets/Average Daily Operating Cost
Long-Term Solvency
 Total Debt Ratio
(Total Assets – Total Equity)/Total Assets =
Debt/(Debt + Equity)
 Long-term Debt is of greater importance since short term
debt constantly changes and accounts payable reflection of
business
Long-Term Debt Ratio = Long-Term Debt / (Long-Term Debt + Equity)
 Times Interest Earned Ratio = EBIT/Interest
 Cash Coverage Ratio = (EBIT + Depreciation)/Interest
 Depreciation does not impact cash
Efficiency Measures
 Inventory Turnover = Cost of goods sold/Inventory
 Day’s sales in inventory = 365/Inventory Turnover
 Receivable Turnover = Sales/Accounts Receivables
 Day’s sales in receivables = 365/Receivable Turnover
 Net Working Capital Turnover= Sales/NWC
 Fixed Assets Turnover= Sales/Fixed Assets
 Total Assets Turnover= Sales/Total Assets
Profitability Measures
 = Sales/NWC
 = Sales/Fixed Assets
 Total Assets Turnover= Sales/Total Assets
 Profit Margin = Net Income/Sales
 Return on Assets (ROA)= Net Income/Total Assets
 Return on Equity (ROE) = Net Income/ Total Equity
 ROE = ROA * (1+ Debt/Equity)
 EPS = Net Income / No of Shares Outstaning
 PE = Price per Share/Earning Per Share
DU PONT IDENTITY
 ROE = Net Income/Equity
= (Net Income/Assets) *(Assets/Equity)
==(Net Income/Sale)*(Sales/Assets)*(Assets/Equity)
=(Net Income/Sale)*(Sales/Inventory)*
(Inventory/Asset)*(Assets/Equity)