Ratio Analysis

Rini Novrianti Sutardjo Tui

Ratio Analysis
History
Examine trends
Budget
Compare actual with
expected values
Competition
Compare with other
firms
Categories of Ratios
Market
Value
Liquidity Asset
Mngt.
Debt
Mngt.
Profit
ability
Ratios
Illuminate some aspects
of how business is doing
Liquidity Ratios
Current Ratio
To ensure solvency the
current ratio has to exceed
1.0.
Quick Ratio
Measures liquidity without
considering inventory (the
firms least liquid current
asset).
s liabilitie Current
assets Current
Ratio Current
_
_
_ =
s liabilitie Current
Inventory assets Current
Ratio Quick
_
_
_

=
Asset Management Ratios
Inventory
Turnover
measures how
many times a
year the firm
uses up an
average stock of
goods.
Average
Collection Period
measures the
time it takes to
collect on credit
sales.
ACP
IT
FAT TAT
Total Asset
Turnover is
more widely
used than Fixed
Asset Turnover.
Fixed Asset
Turnover is
appropriate in
industries where
significant
equipment is
required to do
business.
sales daily Average
s receivable Account
ACP
_ _
_
=
Inventory
CoGS
Turnover Inventory = _
( )
( ) net assets Fixed
total Sales
FAT
_
=
( )
( ) total assets Fixed
total Sales
TAT
_
=
Debt Management Ratios
Times Interest Earned Debt-to-equity Ratio
Cash Coverage
Fixed Charge Coverage
Debt
Mngt.
equity Common
LTdebt
_
=
ense Interest
EBIT
exp _
=
ense Interest
on depreciati EBIT
exp _
+
=
payment lease ense Interest
payment lease EBIT
_ exp _
_
+
+
=
Profitability Ratios
ROS
Return on Sales represents a
fundamental indication of the overall
profitability of the business
ROA
Return on Assets measures the overall
ability of the firm to utilize the assets in
which it has invested to earn a profit.
ROE
Return on Equity measures the firms
ability to earn a return on the owners
invested capital.
Sales
income Net
ROS
_
=
assets Total
income Net
ROA
_
_
=
equity rs Stakeholde
income Net
ROE
'
_
=
Market Value Ratios
PE Ratio
Tells how much investors are
willing to pay for a dollar of
the firms earnings.
Market-to-book
Value Ratio
A healthy company is
expected to have a market
value greater than its book
value.
share per Earning
price stock Current
Ratio PE
_ _
_ _
_ =
share per value Book
price stock Current
ratio value book to Market
_ _ _
_ _
_ _ =
Rate of Return
C= 50
C= 500
C= 450
I= 50
I= 250
I= 200
I= 50
I= 250
I= 200
L= 50
L= 500
L= 450
0
0
0
1
1
1
5
5
5
|
.
|

\
|
+
|
.
|

\
|
+ =
5 , 5 ,
50 50 50 0
i i
F
P
A
P
PW Eq.
i=ROR
A
=100%, >i*= 15%
|
.
|

\
|
+
|
.
|

\
|
+ =
5 , 5 ,
500 250 500 0
i i
F
P
A
P
PW Eq.
i=ROR
B
=50%, >i*= 15%
|
.
|

\
|
+
|
.
|

\
|
+ =
5 , 5 ,
450 200 450 0
i i
F
P
A
P
PW Eq.
i=ROR
B-A
=44.4%, >i*= 15%
A
B
B-A
Net Value Analysis
C= 50
C= 500
C= 450
I= 50
I= 250
I= 200
I= 50
I= 250
I= 200
L= 50
L= 500
L= 450
0
0
0
1
1
1
5
5
5
A
B
B-A
50 . 286 $ 50 50 50
50 . 42 $ 50 50 50
50 . 142 $ 50 50 50
5 %, 15 5 %, 15
5 %, 15 5 %, 15
5 %, 15 5 %, 15
+ =
|
.
|

\
|
+
|
.
|

\
|
=
+ =
|
.
|

\
|

|
.
|

\
|
+ =
+ =
|
.
|

\
|
+
|
.
|

\
|
=
P
F
A
F
NFV
P
A
F
A
NAV
F
P
A
P
NPV
A
A
A
A B A B
A B A B
A B A B
NFV NFV NFV
NAV NAV NAV
NPV NPV NPV
=
=
=

Ratio Analysis
C= 50
C= 500
C= 450
I= 50
I= 250
I= 200
I= 50
I= 250
I= 200
L= 50
L= 500
L= 450
0
0
0
1
1
1
5
5
5
A
B
B-A
0 , 85 . 2
50
50 . 142
> = = =
Cost
A
A
PW
NPV
PVR
0 , 17 . 1
500
6 . 586
> = = =
Cost
B
B
PW
NPV
PVR
0 , 99 . 0
450
444
> = = =

Investment
A B
A B
PW
NPV
PVR
Cl i c k t o e d i t c o mp a n y s l o g a n .
A double pipe heat exchanger with steam in the shell is to be insulated to reduce
heat loss to surroundings. The thickness of insulation, initial cost and projected
annual cost of heat loss are given in the following table. If the minimum ROR is
20% before taxes, determine the optimumthickness of insulation for an insulation
life of 6 years with zero salvage value.
Insulation
Thickness (inch)
0
1
2
3
4
Initial Cost ($)
0
1,200
1,800
2,500
3,500
Annual Heat
Loss Cost ($)
1,400
800
600
500
400