1、 Author: Collins QianRatio AnalysisMarch 19981Agenda UsingratiosTypesofkeyratiosprofitabilityturnoverleverageliquiditycoverageReturnonEquityRatioexercisesForecastingexerciseAbbreviationsKeytakeaways2AnalyzingRatios Ratiosinisolation aremeaningless.Acompanys ratiosmust be examined overtimeand/oragain

2、stitscompetitors ratios.Historical comparisonCompetitivecomparisonCompare presentratios withsamecompanyshistoricalratiosInstablesituations,historicalratiosmay be usedtoprojectfutureperformanceCompare acompanys ratioswith similarfirms ratiosorwith industry averages at thesame point in timeLook fortre

3、ndsLook at relative performance3TheArt of Ratio Analysis Whichratiosare mostimportant in agivensituation?What items shouldbeincluded/excludedincalculatingtheratios?Howmuchinfluencedoesmanagement haveovertheratios?What do theratiossay about thefirmsstrategy?Ratioanalysisisanartaswellasa science.4TheN

4、eedforJudgment PotentialProblemManagement cansubstantially influencefinancials in theshorttermImplicationsNeed to usejudgmenttounderstand financialsRatioanalysisrequireskeen judgment.Financialstatement dataishistorical,not proformaCross-company comparisons aremeaninglessifadjustmentsarenot madefor d

5、ifferentaccounting conventionsThetiming of thereportingperiod influencesfundsflowsand requirementsNeed to understandthathistory doesNOT necessarily predictfutureNeed to be verysensitive about industry-specific seasonality andcyclicalityNeed to standardize acrosscompaniestoadjust fordifferentaccounti

6、ngmethods5Agenda UsingratiosTypesofkeyratiosprofitabilityturnoverleverageliquiditycoverageReturnonEquityRatioexercisesForecastingexerciseAbbreviationsKeytakeaways6TypesofRatiosRatioshelpusunderstand howwell acompanyisperforming.Specifically,howmuchreturnisitgeneratingwith whatlevelofrisk?Howwelldoes

7、 thecompany managecostsrelativetorevenues?ReturnRiskCoverageInterestchargeFixedchargecoverageLiquidityCurrent ratioQuickratioLeverageAssettoequityDebt to equityDebt to total capitalTurnoverReceivablesInventoryPayablesAssetProfitabilityOperatingmarginROSGrossmarginHoweffective is thecompany in managi

8、ng itsresources?What aretherespectiveclaimsofdebtandequity owners?Howriskyisthebusiness?Isthecompanyable to meetits short-termobligations?Isthecompanyable to meetits long-termobligations?7Profitability Ratios- Definitions*This is nota profitabilityratio, butitdoes impactROSProfitability ratiosuselin

9、eitemsfrom theincomestatement.RatiosDefinitionsGrossprofitmargin(orgrossmargin)Sales- costofgoodssoldSalesOperatingprofit margin(oroperating margin)Earningsbeforeinterestand taxesSalesReturnonsales(ROS)ProfitaftertaxSalesEffectivetax rate*TaxesProfitbefore tax8Profitability Ratios- Description Profi

10、tability (ormargin) ratiosareafunctionofboth theindustryandacompanyspositionwithin theindustryboundaries aresetbythe operatingcharacteristicsofthe industrywithintheseboundariesprofitability ratiosaredeterminedbya players relative positionBain typicallyuses gross profitandoperating profittomeasure pr

11、ofitabilityROScanbealteredbynon-operating activities, suchassourcesoffinancingortax ratemanipulationsExtraordinary items,because theyare forunusual events,suchasdiscontinueditemsorassetsales, areexcludedwhen we analyzethe performance of thebase businessProfitability ratiosmeasure afirms abilitytoman

12、age costs relative to revenues.9Profitability Ratios- OverTime Grossprofitmarginshouldstayconstantorincreasebecause costofgoodssoldshouldbeaconstantpercent of sales or shoulddecreaseascompany getspriceincreases and/orvolumediscountsOperatingmarginshouldincreaseasfixedadministrativeand sales costs ar

13、espreadovera greaternumber of unitsEffectivetax rateshouldstayconstantordecreasesincea largerfirm is abletotakeadvantageofmoretaxsheltersAsa companygrows, itsreturnonsalesshould increase.Higherreturn on sales10Profitability Ratios- MarketLeader Grossprofitmarginshouldbehigher since amarket leadercan

14、typically chargemore foritsgoodsand/or receivethe greatest volumediscountsfromsuppliersOperatingprofit marginshouldbesignificantlyhigher, becausehigher volumemeansfixedcostsarespread overmoreunitsandbecausethegrossprofit marginishigherThereshouldbenosignificantdifferenceintheeffectivetax rateReturno

15、nsalesshouldbesignificantlyhigherbecausetheoperating marginshouldbesignificantlyhigherThemarket leaderinanindustryshouldhavethebestprofitability ratios.This is consistentwiththeROS/RMSconcept which saysthatcompanieswithhigh relative marketsharehave highreturnsonsales11TurnoverRatios-DefinitionsNote:

16、Average=(Year Beginning+Year End)/2*Salesisoftena goodproxy*Cost of goods soldisoftenagood proxy*Typically we use365days(i.e.,1year)forthe periodTurnoverratiosuse acombinationofincomestatement andbalance sheetitems.RatiosDefinitionsReceivablesturnoverCreditsalesinperiod*Accountsreceivable averagebal

17、anceInventoryturnoverCost of goods soldinperiodAverage inventoryinperiodPayablesturnoverPurchasesonaccount*Accountspayable averagebalanceAssetturnoverSalesinperiodAverage assetsAnyturnoverratiocan be expressedasa periodratiowhichmeasuresthenumber of daysinthe cycleDays in period*TurnoverratioPeriodr

18、atio=12TurnoverRatios-TransactionCycle*Accountspayable,inventory, andaccountsreceivable arethemajorcomponentsofworking capitalItiscriticalforafirm to manageitspayables, inventory,and receivables.*Cash inflowCash collectedforsalesmadeCash outflowRawmaterials purchasedCash disbursedforraw materialspur

19、chasedFinishedgoodsinventorySalesmadeAccountsreceivable periodAccountspayable periodXXX13TurnoverRatios-Description Turnoverratiosmeasureshow manytimesper yearagivenresourceisconsumedPeriodratios measurethe numberofdays thatistakesfor agivenresourceto“turnover”Managementsobjective is to stretchout t

20、heaccountspayable period(i.e.,havelowaccountspayableturnover)and shortenthe periodsfor accounts receivableand inventory(i.e.,havehigh accounts receivableand inventoryturnover)Turnoverratiosmeasurehowwella firmismanagingits resources.14TurnoverRatios-Tradeoffs RatioImprovementsDecreasethereceivablesc

21、ollectionperiodi.e.,collect theaccountsreceivable fasterDecreasetheinventory holdingperiodi.e.,sell completedproductsfasterIncreasetheaccountpayable periodi.e.,take longertopaysuppliersStrategicTradeoffIfthereceivablescollectionperiodistoo short,customersmay buyata competitorthathasmoregenerouscredi

22、tterms.(Oftenthisperiodisdictatedbyindustrynorms)Iftheinventory holdingperiod is tooshortthecompanymaynot haveenough inventorytofill abig order.Also,the companymay notbeable to outlastastrike, eitheratitsown facility or at oneofitsprimarysuppliers facilitiesIftheaccountspayableperiodistoo long, supp

23、lierscouldraisetheirprices, chargeinterest(oftenatveryhigh rates),orevenrefusetosupply thefirm on credit.Also, workersmay getrestlessifthey havetowaitlongertoreceivetheirpaychecks.Managingturnoverratiosmeansmanagingstrategic trade-offs.15LeverageRatios-Definitions*Allthreeratios hereare called“l(fā)ever

24、age” ratiosbydifferentpeople,sobesure to understandwhichratioisbeingusedwhen someoneistalkingaboutleverageLeverageratiosuse lineitemsfromthebalance sheet.Ratios*DefinitionsDuPontleverageratioAssetsEquityDebt to equityratioLong-termdebtEquityDebt to total capitalordebt to total assetsratioTotalliabil

25、itiesDebt +equityTotalliabilitiesAssets=16LeverageRatios-Description Moneycanberaised fromdebtsources (banks,bondmarkets)orequitysources(stockholders)Leverageratiosreflectboth thefinancingpoliciesofthe firmand theriskinessofthe businessInordertoanalyze afirms leverage ratios,one needs to understandt

26、he definitions ofdebt andequityLeverageratiosmeasuretherespectiveclaimsofdebtandequity holders.17Debt VersusEquity Contractualpaymentsover thelife of theloanInvestorlegally guaranteedfullreturnofprinciple plusinterestnothing above thatIncase of liquidation,debtorhas preferentialclaimonproceedsfrom s

27、aleofassetsNoguaranteed payments fromcommon stockInvestor“owns”partoffirmrighttoappreciationoffirms valueIncase of liquidation,equityownertakeswhatisleft (maybenothing)Debt andequityhavevery differentcharacteristics.Debt =anythingthatcontractually requires payments to be madebefore theequityholdersh

28、ave accesstothefirms earningsEquity=thevalueofthe firmleftover after allthedebtholders havebeenpaidLowerrisk to investor;investordemands lower returnHigherrisktoinvestor;investordemands higherreturn18Debt Questions- Debtand Equity Debt in Leverage RatiosBain typicallylooksonly at long-termdebt (debt

29、 withaterm of 1yearormore)Accountantsmeasure debtasshort-termdebt pluslongterm debtEquityinLeverageRatiosBain typicallyuses themarketvalueofequity (I.e.,thesharepricemultipliedbythenumber of shares).Othersmay usethebookvalueofequity, which is theamountshownonthe balancesheet19Debt Questions Accounts

30、payable?Short-term debt?Long-termdebt?Cancelable leases?Noncancelable leases?Preferredstock?Commonstock?Deferredtax?Wouldyoudefine thefollowingasdebt?20Debt Answers AccountspayableShort-term debtLong-termdebtCancelable leasesNoncancelable leasesSome items areclearly debt, othersareclearlynotdebt,sti

31、llothers aredebatable.Notdebt.Itispart of workingcapital,and is “secured”bytheinventory andreceivablesthat it is usedtofinanceDebt, if it usedtofinancecapital expansionsofthe companyNotdebt, if it usedtofinanceworking capitalDebt.Notdebt.Because theyare cancelable, theyare notcontractualobligationsD

32、ebt.Because theyare non-cancelable,they arecontractualobligations.(Forall publicly tradedUScompanies, thepresent value of allthenoncancelableleasepaymentsmust be disclosedinbalance sheet footnotes.)DebatableArgumentforequity -contractualobligationstopay dividendsonpreferredstockare metafterdebtholde

33、rsclaims aremetArgumentfordebt- there is acontractualobligationtopaydividends on preferredstockbeforecommon stock dividend payments canbemadeNotdebt.ItisequityCommonstockDebt,butdebatable.Oftenconsidered debtgivenlong-term natureDeferredtaxPreferredstock21Liquidityand Coverage Ratios- DefinitionsLiq

34、uidityratios useline items fromthebalance sheet.Coverageratios useline items fromthe incomestatement.RatiosDefinitionsCurrent ratioCurrent assetsCurrent liabilitiesQuickratio(acidtest)Cash +marketablesecurities +receivablesCurrent liabilitiesInterestcoverageratioEarningsbeforeinterestand taxesIntere

35、stexpenseFixedchargecoverageEarningsbeforeinterestand taxesAllessential payments (includingleasepayments)Liquidity:Coverage:22Liquidityand Coverage Ratios- Description Acceptable valuesfortheseratios differbyindustry.However, whenthe currentratioorcoverageratios fallbelow1that means thefirm is unabl

36、etomeet itsobligationsItisa usefulexercisetocalculatehow muchrevenuecoulddrop (orcostsrise)beforecoveragewoulddropbelow1Liquidityratios measurethe firmsability to meetits short-termobligations.Coverageratiosmeasurethefirms abilitytomeetitslong-term obligations.23Agenda UsingratiosTypesofkeyratiospro

37、fitabilityturnoverleverageliquiditycoverageReturnonEquityRatioexercisesForecastingexerciseAbbreviationsKeytakeaways24ReturnonEquity Returnonequity is definedasprofit after tax(earnings) dividedbyequity.Itrelateseconomicoutputs (profit) to inputs(equity).Ittellsustheamount of profitsthe companyearned

38、 on eachdollar thestockholdersinvestedinthe firm.Itisimportanttonotethat notallofthe earnings arepaid to thestockholderswhenthey areearned.Only someportionoftheearningswillbereturnednowinthe formofdividends.The remainder(retainedearnings) willbere-investedinthe companytofinancegrowthThesizeofthedivi

39、dedisdecided by theboardofdirectors; an individualstockholderhas no influenceover whenhe/she actually receives thereturnthathe/shehas earnedItisa combination ofprofitability,turnover,and leverage ratiosReturnonequity,ROE, is theacid testofsuccessforabusiness.25DuPontFormula Byseparating ROEinto itsc

40、omponents,onecan gaininsightinto howtoimprove theperformanceofa business.ROE=ProfitaftertaxEquityROE=ProfitaftertaxSalesSalesAssetsAssetsEquityXXReturnonAssetsLeverageROSAssetturnoverThis is known as theDuPontformulaROE=ProfitabilityXTurnoverXLeverage26Agenda UsingratiosTypesofkeyratiosprofitability

41、turnoverleverageliquiditycoverageReturnonEquityRatioexercisesForecastingexerciseAbbreviationsKeytakeaways27UnidentifiedIndustriesExercise Theobjective of thisexerciseistotestyour understandingoffinancial ratios.Exercise:Thebalance sheets(inpercentageform)andselectedratios forsixindustriesaregivenont

42、he followingpage.Please match eachofthe sixindustries to thefinancialinformationCoal miningGrocery storesHotelsand motelsLegalservicesPackagedsoftwarePotatochipsand snacks28UnidentifiedIndustriesExercise- DataIndustry Balance Sheet (%)ABCDEF*Ratios do not tie to balance sheet items because they were

43、 calculated using a slightly different data set. *This is NOT inventory turns. Inventory turns would be COGS to inventory.*Sales to assetsSource: Industry Norms Key Business Ratios, Dun & BradstreetCashAccounts receivableNotes receivableInventoryOther currentTotal current assetsFixed assetsOther non

44、-current assetsTotal assetsAccounts payableBank loansNotes payableOther current liabilitiesTotal current liabilitiesOther long-term liabilitiesDeferred creditsNet worthTotal liabilities & net worthRatios*Quick ratio (times)Current ratio (times)Total liabilities to net worth (%)Collection period (day

45、s)Sales to inventory (times)*Assets turns* (times)Gross margin (%)Return on sales (%)Return on assets (%)Return on equity (%) 9.8%4.00.61.44.620.465.114.5 100.0%3.60.12.411.817.944.60.337.2 100.0%0.7x1.2x127%9.1 days78.5x0.7x 64%7%5%14% 9.3%21.20.22.02.735.451.712.9100.0%15.23.315.133.625.540.9 100.

46、0%0.9x1.1x87%52.2 days7.9x1.9x 38%3%7%16% 4.8%28.614.64.552.535.112.4 100.0%15.40.40.414.030.217.51.750.6 100.0%1.6x2.5x62%30.9 days23.7x2.9x29%2%5%7% 14.1%5.30.932.63.956.830.412.8 100.0%15.70.23.011.630.522.00.347.2100.0%0.6x1.9x93%2.6 days19.0 x5.0 x22%1%6%13% 31.0%18.80.80.713.965.226.08.8 100.0

47、%4.00.44.826.335.510.81.252.5 100.0%1.4x1.9x67%51.8 days63.1x4.0 x57%12%20%29% 22.1%32.20.54.78.568.018.613.4100.0%10.60.22.023.336.110.31.652.0 100.0%1.5x2.0 x74%65.3 days39.9x1.9x 59%6%10%19%29UnidentifiedIndustriesExercise- Answer Characteristics:Financialratios:Companies:HotelsandMotelsVery high

48、fixedassetsLowinventoryShortcollection periodLowassetturnoverHigh gross marginHigh leverageFixedassets=65%Inventory=1%Collection period= 9daysAssetturns= 0.7xGrossmargin=64%Totalliabilitiestonetworth=127%ACoal MiningVery highfixedassetsLowinventoryLong collectionperiodFixedassets=52%Inventory=2%Coll

49、ection period=52daysBPotatoChips& SnacksLowpercentageofcashLong collectioncycleCash =5%Collection =31 daysCGroceryStoresHigh percentageofcashLowaccountsreceivableShortcollection periodHigh inventoryGood liquidityratiosCash =14%Accountsreceivable =5%Collection period= 3daysInventory=33%Quickratio= 0.

50、6x; currentratio=1.9xDLegalServicesHigh percentageofcashAlmostzeroinventoryHigh asset turnoverHigh profitabilityLong collectionperiodCash =31%Inventory=1%Assetsturns=4.0 xGrossmargin=57%;ROS =12%;ROE=29%Collection period=52daysEPrepackagedSoftwareHigh percentageofcashHigh accounts receivableLowinven

51、toryHigh gross marginLowfixedassetsSignificantintangible assets(patents)Cash =22%Accountsreceivable =32%Inventory=5%Grossmargin=59%Fixedassets=19%Othernon-currentassets=13.4%F30GilletteExercise Exercise:PleasecalculateGilletteCompanys keyfinancialratios based on its1996 annualreportProfitabilityTurn

52、overLeverageLiquidityand coverageTheobjective of thisexerciseistotestyour abilitytocalculate keyfinancialratios.Note:For thisexercise, do notinclude merger-related costs in thecalculations.31GilletteExercise-Profitability Ratios*This is nota profitabilityratio, butitdoes impactROS*Excludingmerger-re

53、latedcosts.Non-operating chargesshould notbeincludedintheoperating profitmargin.RatiosGilletteRatioCalculationsGrossprofitmargin(orgrossmargin)Sales- costofgoodssoldSalesOperatingprofit margin(oroperating margin)Earningsbeforeinterestand taxes*SalesReturnonsales(ROS)Profitaftertax*SalesEffectivetax

54、rate*TaxesProfitbefore tax6,016.09,697.7= 62%2,049.39,697.7=21.1%1,231.79,697.7=12.7%576.31,525.0= 37.8%(p.24)(p.24)(p.24,p.27)(p.24)Page Numberin1996AnnualReport1,636.3 +413.09,697.7=948.7+ 283.09,697.7=32GilletteExercise-TurnoverRatiosNote:Average=(YearBeginning+YearEnd)/2*Salesisoftena goodproxy*

55、Cost of goods soldisoftenagood proxyRatiosGilletteRatioCalculationsReceivablesturnoverCreditsalesinperiod*Accountsreceivable averagebalance9,697.7(2,724.6+ 2,290.8)/2=3.87(p.24,p.25)or3653.87=94daysInventoryturnoverCost of goods soldinperiodAverage inventoryinperiod3,681.7(1,358.2+ 1,267.6)/2=2.80(p

56、.24,p.25)or3652.80=130 days=PayablesturnoverPurchasesonaccount*Accountspayable averagebalance3,681.7(547.3+498.0)/2=7.04(p.24,p.29)or3657.04=52days=3651.00AssetturnoverSalesinperiodAverage assets9,697.7(10,435.3+8,940.1)/2=1.00(p.24,p.25)or=365 days=Page Numberin1996AnnualReport33GilletteExercise-Le

57、verageRatios*Allthreeratios hereare called“l(fā)everage” ratiosbydifferentpeople,sobesure to understandwhichratioisbeingusedwhen someoneistalkingaboutleverage.*Theinclusion of deferred incometaxesinlong-termdebtisdebatable.Ratios*GilletteRatioCalculationsDuPontleverageratioAssetsEquityDebt to equityrati

58、oLong-termdebt*EquityDebt to total capitalordebt to total assetsratio10,435.34,490.9= 2.32(p.25)14.5 +1,490.4+ 298.94,490.9=0.40(p.25)5,944.410,435.3=0.57(p.25)Page Numberin1996 AnnualReport1,803.84,490.9=TotalliabilitiesDebt +equityTotalliabilitiesAssets=34GilletteExercise-Liquidityand Coverage Rat

59、iosRatiosGilletteRatioCalculationsCurrent ratioCurrent assetsCurrent liabilitiesQuickratio(acidtest)Cash +marketablesecurities +receivablesCurrent liabilitiesInterestcoverageratioEarningsbeforeinterestand taxes*InterestexpenseFixedchargecoverageEarningsbeforeinterestand taxes*Allessential payments(i

60、ncluding lease payments)Liquidity:Coverage:4,753.22,934.7=1.62(p.25)76.9 +7.0 +2,724.62,934.7=0.96(p.25)2,049.3 -44.476.8 -9.9=29.97(p.24)2,049.3 -44.4(76.8- 9.9)+93.0=12.54(p.24,p.31)Page Numberin1996 AnnualReport*”O(jiān)thercharges -net”undernon-operating chargeshavebeen included herebecausethey appear