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Financial Ratios

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Financial Ratios

  1. 1. Financial RatiosFinancial Ratios Analyzing How a BusinessAnalyzing How a Business PerformsPerforms
  2. 2. Why Do Ratio Analysis?Why Do Ratio Analysis? MeasurableMeasurable VerifiableVerifiable BenchmarkingBenchmarking Track-recordTrack-record
  3. 3. Where Do I Get MyWhere Do I Get My Information FromInformation From Financial StatementsFinancial Statements Balance SheetBalance Sheet Income StatementIncome Statement
  4. 4. Types of RatiosTypes of Ratios LiquidityLiquidity ProfitabilityProfitability EfficiencyEfficiency
  5. 5. LiquidityLiquidity Measures how well a company can satisfy itsMeasures how well a company can satisfy its debts.debts.
  6. 6. ProfitabilityProfitability Measures how much profit the companyMeasures how much profit the company generates based upon its sales.generates based upon its sales.
  7. 7. EfficiencyEfficiency Measures how well a company uses its assetsMeasures how well a company uses its assets to generate income.to generate income.
  8. 8. Analyze TrendsAnalyze Trends Look at a minimum of two years to see howLook at a minimum of two years to see how the company is performing. Three years orthe company is performing. Three years or more is beneficial.more is beneficial.
  9. 9. Industry StandardsIndustry Standards How the company is performing against otherHow the company is performing against other companies within the same industry.companies within the same industry.
  10. 10. Liquidity RatiosLiquidity Ratios Tells us if a company can meet their currentTells us if a company can meet their current liabilities with their current assets.liabilities with their current assets.
  11. 11. Current RatioCurrent Ratio Current Assets divided by Current LiabilitiesCurrent Assets divided by Current Liabilities Current AssetsCurrent Assets CashCash DebtorsDebtors StockStock
  12. 12. Current LiabilitiesCurrent Liabilities CreditorsCreditors Notes PayableNotes Payable Accrued ExpensesAccrued Expenses
  13. 13. Quick RatioQuick Ratio Quick Assets divided by Current LiabilitiesQuick Assets divided by Current Liabilities Quick Assets = Current Assets less StockQuick Assets = Current Assets less Stock Some assets are not that liquid – especiallySome assets are not that liquid – especially StockStock Think how long it has taken Circuit City andThink how long it has taken Circuit City and Home Depot Expo to conduct theirHome Depot Expo to conduct their liquidation sale.liquidation sale.
  14. 14. What Does This MeanWhat Does This Mean In generalIn general Current Ratio should be 2 or moreCurrent Ratio should be 2 or more Quick Ratio should be at least 1Quick Ratio should be at least 1 Indicates that the company has money leftIndicates that the company has money left over to work with once it has satisfied itsover to work with once it has satisfied its current liabilities.current liabilities.
  15. 15. Working CapitalWorking Capital Not a Ratio but a dollar figure – how muchNot a Ratio but a dollar figure – how much money is left after our Current Assets aremoney is left after our Current Assets are used to satisfy our Current Liabilites.used to satisfy our Current Liabilites.
  16. 16. ProfitabilityProfitability Sales Revenue (Turnover) will always be theSales Revenue (Turnover) will always be the denominator used.denominator used.
  17. 17. Gross Profit MarginGross Profit Margin Measures how much money a company netsMeasures how much money a company nets after it sells its inventory.after it sells its inventory. Helps the company to determine if its pricingHelps the company to determine if its pricing is adequateis adequate
  18. 18. Net Profit MarginNet Profit Margin Net Income divided by Sales RevenueNet Income divided by Sales Revenue Measures how much profit a company makesMeasures how much profit a company makes as a percentage of salesas a percentage of sales
  19. 19. Efficiency RatiosEfficiency Ratios Debtor DaysDebtor Days Measures how timely a company collects itsMeasures how timely a company collects its outstanding Trade Debts.outstanding Trade Debts. Debtors divided by Sales times 365.Debtors divided by Sales times 365.
  20. 20. Inventory Turnover RateInventory Turnover Rate Measures how many times a companyMeasures how many times a company replaces the dollar value of its inventory.replaces the dollar value of its inventory. Inventory divided by Sales times 365Inventory divided by Sales times 365
  21. 21. What to Look ForWhat to Look For Trade Debtors TurnoverTrade Debtors Turnover The longer debt is outstanding the longer theThe longer debt is outstanding the longer the company does not have use of the moneycompany does not have use of the money
  22. 22. Inventory TurnoverInventory Turnover Each industry will have its own generalEach industry will have its own general standard. How does this companystandard. How does this company compare? How have the ratios changedcompare? How have the ratios changed over the years.over the years.

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