Additional Ratios (from textbook, Appendix 4B, and other sources)

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Additional Ratios(from textbook, Appendix 4B,
and other sources)
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Analyzing the Financial Statements

• Comparisons across time
• Comparisons within the industry
• Comparisons within the financial statements
• Common-size statements
• Ratio analysis

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Comparisons Within the Industry

• Financial accounting numbers can also be made
  more meaningful if they are compared to those of
  similar companies.
• Comparison of financial accounting numbers with
  industry averages is also helpful.
• Sources of industry information include
• Dun Bradstreet
• Robert Morris Associates
• Moody
• Standard Poor

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Comparisons Within the Financial Statements

• Common-size financial statements
• Common size income statement (where all other
  components are expressed as a percentage of sales
  or revenues) allows for comparisons across time
  and across companies.

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Common-Size Income Statement for La-Z-Boy, Inc.
Income Statement (in millions) 2003
2002 Net sales 2,112 100 2,154
100 Cost of sales (1,617) 77 (1,692)
79 Expenses and charges (459) 21
(400) 18 Net income 36 2
62 3 On the income statement, cost of
goods sold, expenses, and net income are often
expressed as percentages of net sales. On the
balance sheet, assets and liabilities can be
expressed as percentages of total assets.
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Comparisons Within the Financial Statements

• Ratio analysis allows for measures of specific
  activities of a company.
• Profitability ratios
• Long-term solvency ratios
• Short-term Liquidity ratios
• Asset turnover ratios

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Profitability Ratios

• These ratios are designed to measure a firms
  earnings power.
• Net income, the primary measure of the overall
  success of a company, is compared to other
  measures of financial activity or condition to
  assess performance as a percent of some level of
  activity or investment.

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Profitability Ratios
Return on Net Income Equity
Average Equity This ratio measures the
effectiveness at managing capital provided by the
owners.
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Profitability Ratios
Return on Net Income Sales
Net Sales This ratio
provides an indication of a companys ability to
generate and market profitable products/services
and control its costs also called the Profit
Margin.
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Long-term Solvency Ratios

• Solvency examines the ability of a company to
  meet all of its debt obligations.
• Solvency ratios consider the relationship between
  debt and other components of the financials
  (assets and equity)
• Solvency ratios also measure the ability of the
  company to meet its interest obligation.

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Solvency Ratios
Capital Average Total Assets Structure
Average Equity Leverage This ratio
measures the extent to which a company relies on
borrowings (liabilities).
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Solvency Ratios
Debt to Equity Average Total
Liabilities Ratio Average
Equity This ratio compares liabilities to
stockholders equity and is another measure of
capital structure leverage.
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Solvency Ratios
Interest Net Income Tax Expense Interest
Expense Coverage Interest Expense This ratio
compares the annual funds available to meet
interest to the annual interest expense.
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Solvency Ratios
Accounts Cost of Goods Sold Payable
Average Accounts Payable Turnover This ratio
measures the extent to which accounts payable is
used as a form of financing.
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Liquidity Ratios

• Liquidity refers to a companys ability to meet
  its current debts as they come due.
• There is pressure on companies with high levels
  of leverage to manage their liquidity.

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Liquidity Ratios
Current Current Assets Ratio Current
Liabilities This ratio measures solvency in
the sense that current assets can be used to meet
current liabilities.
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Liquidity Ratios
Quick Cash Marketable Securities A/R
Ratio Current Liabilities Similar to the
current ratio, this ratio provides a more
stringent test of a companys liquidity.
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Asset Turnover Ratios

• Asset turnover ratios are typically computed for
  total assets, accounts receivable, inventory, and
  fixed assets.
• These ratios measure the speed with which assets
  move through operations or reflect the number of
  times during a given period that these specific
  assets are acquired, used, and replaced.

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Asset Turnover Ratios
Receivables Net Credit Sales Turnover Average
Accounts Receivable This ratio reflects the
number of times the trade receivables were
recorded, collected, and recorded again during
the period. Days outstanding is an alternative
measure.
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Asset Turnover Ratios
Inventory Cost of Goods Sold Turnover Average
Inventory This ratio measures the speed with
which inventories move through operations. Days
outstanding is an alternate measure.
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Asset Turnover Ratios
PPE Sales Turnover Average PPE This ratio
measures the speed with which assets related to
property, plant and equipment are used up.
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Asset Turnover Ratios
Total Asset Sales Turnover Average Total
Assets This ratio measures the speed with which
all assets are used up in operations.