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 Critical Ratios
  • Common-size balance sheet expresses all balance sheet items as a percentage of total assets.
     
  • Common-size income statement expresses all income statement items as percentage of sales.
     
  • Common-size cash flow statement expresses each cash inflow/outflow as a percentage of total cash inflow/outflow, or as a percentage of revenue.
     
  • Horizontal Common-size financial statement analysis: Expresses each line item relative to its value in a common base period.

 

 Liquidity Ratios
 

Current Ratio = Current Asset / Current Liabilities (CL)

 

Quick Ratio = (Current Asset – Inventory) / CL
 

Cash Ratio = (Cash + Mktable Securities) / CL
 

Defensive Interval = (Cash + Mkt. Sec. + Receivables) / Daily Cash Expenditures
 

Question:

Assuming current assets are $160,000 and current liabilities are $40,000 the current ratio is?
 

Ans: 4

Receivable, Inventory, Payables Turnover Ratios

 

All of which are used in the cash conversion cycle:

  • Receivables turnover = Net annual sales / avg. receivables
     
  • Payables turnover ratio = Purchases / avg. trade payables
     
  • Days of inventory in hand = 365 / Inventory turnover
     
  • Cash conversion cycle = Days of inventory on hold + Day of sales outstanding – Days of payables
     
  • Inventory turnover = Cost of goods sold / avg. Inventory
     
  • Days of sales outstanding = 365 / Receivables turnover
     
  • No. of days of payables = 365 / Payables turnover

Question:

If Neev, Inc. has annual sales of $1,000,000, average accounts payable of $400,000, and average accounts receivable of $350,000, Neev's receivables turnover and average collection period are closest to
 

Ans:

2.85, 127.75


Total Asset, Fixed Asset, & Working Capital Turnover Ratios

 

Total Asset Turnover = Revenue / Avg. Total Net Asset
 

Question:
 

Find the Total Asset Turnover Ratio given:
 

Net Sales = $32,500

Net Assets (current year) = $11,400

Net Assets (previous year) = $9,800
 

Ans:

Average Net Assets = ($11,400 + $9,800) / 2 = $10,650
 

Total Asset Turnover ratio = 32,500 / 10,650 = 3.05

 

Fixed Asset Turnover = Revenue / Avg. Net Fixed Asset
 

Working Capital Turnover = Revenue / Avg. Working Capital

 

 Profitability Ratios
 

Gross, Operating & Net Profit Margins

 

Gross Profit Margin = Gross Profit / Revenue
 

Operating Profit Margin = Operating Profit / Revenue = EBIT / Revenue
 

Net Profit Margin = Net Income / Revenue
 

Neev Corp. earned $10mn in revenue from producing widgets and incurred $5mn in COGS-related expense. ABC's gross profit margin would be 50%.
 

Return on Total Capital: (ROTC)
 

Return on Capital = EBIT/ Avg. Total Capital
 

Question:

Neev Corp. earned $20mn in revenue from producing widgets and ABC's operating profit margin would be 30%.

For the financial year 2005 & 2006 total capital was $55mn & $75mn. Calculate the return on capital of Neev Corp for the FY2006?
 

Ans:

ROC = (20 * 30%) / [(55 + 75)/2] = 9.23%


Solvency Ratios

 

Total Debt Ratio = Total debt/ Total asset
 

Debt to Equity Ratio = Total debt / Total equity
 

If a company has $10 in debt and $20 in equity, it has a debt to equity ratio of 0.5 ($10M/$20M)


Interest & Fixed Charge Coverage

 

Interest & Fixed Charge Coverage
 

Interest Coverage = EBIT/ Interest
 

Fixed Charge Coverage = (EBIT + Lease payments)/ (Interest + Lease payments)
 

Question:

Neev Inc.'s income statement shows sales of $100,000, cost of goods sold of $40,000 pre-interest operating expense of $30,000, and interest expense of $10,000. Neev's interest coverage ratio is approx?
 

Ans: 3 times
 

Growth Rate g = RR x ROE
 

Retention Rate = 1 – Dividend Payout Ratio
 

Year

Company XYZ

Company SPK

Net Income

30,000,000

80,000,000

No. of Stock Holders

3,000,000

5,000,000

Net Income per Share

$10.00

$16.00

Dividend Declared

$4.00

$6.00

Dividend Yield

40.00%

37.5%

RR

60%

62.5%

ROE

25%

35%

G

15.00%

21.88%

 

 

Performance Ratios
  • Cash Flow to Revenue = CFO/ Net Revenue
     
  • Cash Return on Assets = CFO / Average Total Assets
     
  •  Cash Return on Equity= CFO/ Average Total Equity
     
  • Cash to Income Ratio = CFO / Operating Income
     
  • Cash Flow per Share = (CFO – Preferred Dividends)/ weighted average number of common shares

 





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