Financial Ratio Analysis

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Financial Ratio Analysis

• How can published financial statements be used to
  assess financial performance?

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Financial Ratio Types

• Market Value
• Profitability
• Asset Activity
• Leverage
• Liquidity

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Market Value Ratios

• Examples Market-to-Book Price-Earnings
• Questions How do securities markets value the
  companys assets? Earnings?

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Profitability Ratios

• Examples Return on assets, equity, invested
  capital gross, net profit margin
• Questions How profitable is the company per
  dollar invested in the business per dollar of
  sales?

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Asset Activity Ratios

• Examples asset turnover, average collection
  period, inventory conversion period, payables
  deferral period
• Questions How efficiently does the company use
  its assets? How long does it take assets or
  liabilities to turn into cash?

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Leverage Ratios

• Examples Debt/assets Debt/equity Interest
  coverage
• Questions How much of a burden does debt pose
  relative to assets, equity or cash flow? How
  risky is the company?

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Liquidity Ratios

• Examples Current ratio, quick ratio, interval
  measure
• Questions How easily can the company meet its
  immediate cash requirements? How risky is the
  company?

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Financial Ratios Relative to What?

• By themselves, financial ratios have no meaning.
  We need to compare to
• Past data for the same company
• Data for similar companies (e.g., same industry)
• Other ratios (i.e., DuPont ratios, Cash
  Conversion Cycle)

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A Good Source of Company Ratios

• www.investor.reuters.com

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Dell and Gateway Margin Trends
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Dell, Gateway and Computer Hardware
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DuPont Ratios

• Net Income x Sales x Assets Net Income
• Sales Assets Equity
  Equity
• Net profit X Asset x Equity
  ROE
• margin turnover multiplier

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DuPont Analysis Selected Companies
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Cash Conversion Cycle Selected Companies