Professional Documents
Culture Documents
Financial Performance
• Liquidity
• Efficient use of Assets
• Leverage (financing)
• Profitability
We will want to answer
Questions about the firm’s
• Liquidity
• Efficient use of Assets
• Leverage (financing)
• Profitability
Financial Ratios
• Tools that help us determine
the financial health of a
company.
• We can compare a
company’s financial ratios
with its ratios in previous
years (trend analysis).
• We can compare a
company’s financial ratios
with those of its industry.
ABC Ltd
Balance Sheet
As on 30th June ….
Assets Liabilities & Equity
Cash $2,540
Marketable securities Accounts payable 9,721
1,800 Notes payable 8,500
Accounts receivable Accrued taxes payable
18,320 3,200
Inventories 27,530 Other current liabilities
Total C.A 4,102 Total current liabilities
50,190 25,523
Long-term debt (bonds)
Plant and equipment
22,000
43,100
Total liabilities 47,523
less accum. dep. 11,400
Common stock ($10 par)
Net plant & equip. 31,700
13,000
Total assets 81,890 Paid in capital 10,000
ABC Ltd.
Income Statement
For the period ending on 30th June,….
Sales (all credit)
$112,760
Cost of Goods Sold
(85,300)
Gross Profit
27,460
Operating Expenses:
Selling (6,540)
General & Administrative (9,400)
Total Operating Expenses (15,940)
Earnings before interest and taxes (EBIT)
11,520
Interest charges:
Interest on bank notes: (850)
Interest on bonds: (2,310)
Total Interest charges
ABC ltd
Other Information
• Do we have enough
liquid assets to meet
approaching obligations?
What is ABC Ltd.’s
Current Ratio?
What is ABC Ltd.’s
Current Ratio?
50,190
25,523 = 1.97
What is ABC Ltd.’s
Current Ratio?
50,190
25,523 = 1.97
11,520 = 14.07%
81,890
What is the firm’s
Operating Income Return
on Investment (OIROI)?
11,520 = 14.07%
81,890
•Slightly below the industry
average of 15%.
What is the firm’s
Operating Income Return
on Investment (OIROI)?
11,520 = 14.07%
81,890
•Slightly below the industry
average of 15%.
•The OIROI reflects product
pricing and the firm’s ability to
keep costs down.
What is their Operating
Profit Margin?
What is their Operating
Profit Margin?
11,520 = 10.22%
112,760
What is their Operating
Profit Margin?
11,520 = 10.22%
112,760
85,300
27,530 = 3.10 times
What is the firm’s Inventory
Turnover?
85,300
27,530 = 3.10 times
112,760
31,700 = 3.56 times
What is the firm’s Fixed
Asset Turnover?
112,760
31,700 = 3.56 times
15,000
100,000
ROE = = 15%
ROE =
How does Leverage
work?
• Suppose the same $100,000
firm is financed with half
equity, and half 8% debt
(bonds). Earnings are still
$15,000.
15,000 - 4,000
ROE = 50,000 =
How does Leverage
work?
• Suppose the same
$100,000 firm is financed
with half equity, and half
8% debt (bonds). Earnings
are still $15,000.
15,000 - 4,000
ROE = 50,000 =
22%
What is ABC Ltd.’s Debt
Ratio?
What is ABC Ltd.’s Debt
Ratio?
47,523 = 58%
81,890
What is ABC Ltd.’s Debt
Ratio?
47,523 = 58%
81,890
If the industry average is 47%, what
does this tell us?
What is ABC Ltd.’s Debt
Ratio?
47,523 = 58%
81,890
If the industry average is 47%, what
does this tell us?
11,520
3,160 = 3.65 times
What is the firm’s Times
Interest Earned Ratio?
11,520
3,160 = 3.65 times
5,016
34,367 = 14.6%
What is ABC Ltd.’s
Return on Equity (ROE)?
5,016
34,367 = 14.6%
5,016
34,367 = 14.6%
Brings
together:
• Profitability
• Efficiency
• Leverage
(Net Profit Margin) X (TA Turn Over)
(1-Debt Ratio)
== 14.6%
The DuPont Model
Net Profit Total Asset
ROE =Debt x / (1- )
Margin Turnover
Ratio
The DuPont Model
Net Profit Total Asset
ROE =Debt x / (1- )
Margin Turnover
Ratio
= x /(1- )
Net Income Sales
Total Debt
Sales Total Assets
Total Assets
The DuPont Model
Net Profit Total Asset
ROE =Debt x / (1- )
Margin Turnover
Ratio
= x /(1- )
Net Income Sales
Total Debt
= TotalSales
x
Assets / (1 -
Total Assets )
5,016 112,760
The DuPont Model
Net Profit Total Asset
ROE =Debt x / (1- )
Margin Turnover
Ratio
= x /(1- )
Net Income Sales
Total Debt
= TotalSales
x
Assets / (1 -
Total Assets )
= 14.6%
5,016 112,760