Ratio Analysis Notes - Seminar 4 PDF

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RATIO ANALYSIS LISTLIQUIDITY RATIOS1 Current Ratio Current Asset Current Liabilities-Short-term debt paying ability of the company. -the ability of the company to convert current assets to cash to pay off current liabilities within a year. The higher the ratio, the better. 2 Acid-test Ratio Cash + S...

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RATIO ANALYSIS LIST

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LIQUIDITY RATIOS Current Ratio

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Current Asset Current Liabilities

-Short-term debt paying ability of the company. -the ability of the company to convert current assets to cash to pay off current liabilities within a year. - The higher the ratio, the better.

Acid-test Ratio

Cash + ST Investments + Curr Rec. Current Liabilities

- Like Current Ratio but exclude Prepayments & Inventories because not easily convertible into cash within short period of time. - This ratio measures company ability to meet urgent debts - The higher the ratio, the better it can meet urgent debts.

Inventory Turnover

Cost of Goods Sold Average Inventory*

-how many times a company sells its inventory (turnover) per year. -measures how quickly the biz sells its inventory - the higher the turnover, the better it is. -Low turnover means obsolete goods or hold more goods then it needs (take up area space)

* (Beg Inv + End Inv) 2

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Days’ sales in Inventory

Ending inventory x 365 Cost of Goods Sold

-measures how long it takes, meaning

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number of days it takes to sell a good. - the lesser days, the better. It means the good is fast moving. 5

A/C Receivable Turnover

Net Sales Ave A/C Receivables * * (Beg A/C Rec + End A/C Rec) 2

-measure how many times a company converts its receivables into cash per year -indicates likelihood of collection -the higher the turnover ratio, the better it is.

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Days’ Sales Uncollected

A/C Receivables x 365 Net Sales

-how frequently a company collects it’s A/C Receivables. - the lower the number of days uncollected, the better is the debt collecting ability.

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A/C Payable Turnover

Cost of Goods Sold Average A/C Payable *

-measures how quickly a company pays off its suppliers - the higher means the faster the company pays off, which might not be a good thing as this are interest-free financing of inventory purchase. Should make good use of it.

* (Beg A/C Pay + End A/C Pay) 2

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Days’ Purchases in A/C Payable

A/C Payable x 365 Cost of Goods Sold

MARKET PROPECTS RATIOS Earnings per Net profit – Pref Share Dividends share Wt. Ave. Ord Shares Outstanding

-measures how long it takes to pay the credit suppliers.

-Net profit that backs up every ordinary share

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Price-Earnings Ratio

Market Price per share Earnings per share

- reveals about stock market’s expectation for a company’s future growth in earnings, opportunities etc.

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Dividend Yield

Annual cash dividends per share Market value per share

-measures the annual cash dividends distribute to ordinary shareholders in relative to the share market price.

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Book value per Ordinary Share

S/H Equity applicable to Ord shares Number of Ord. Shares outstanding

-reflects the amount of shareholders’ equity applicable to Ordinary shares on per share basis.

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SOLVENCY RATIOS Debt-to-Equity Total Liabilities Ratio Total Equity

Times-InterestEarned

Profit before interest and tax Interest expense

-Measures proportion of equity and debt a company is using to finance its assets -The lower the ratio, the better it is. - Less risky as the company relies lesser on debts to finance the assets. - Measure the proportionate amount of profit that can be used to cover interest expense. -Shows the firm’s ability to make interest payment. -Also known as Interest Coverage Ratio. -It is a solvency ratio because interest is a fixed long term expense, if a company can’t make the 3

payments, it could go bankrupt and cease to exist. -The higher the better. Means more profit to cover the interest expense. 15a

Equity Ratio

Total Equity Total Assets

-Measures the amount of assets financed by equity - the higher the better. -Means lower risk as depend more on equity funding.

15b

Debt Ratio

Total Liability Total Assets

Note: Opposite from Equity Ratio -Measures the amount of assets financed by liability - the lower the better. -Means lower risk as depend lesser on external borrowings.

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PROFITABILITY & EFFICIENCY RATIOS Total Assets Net Sales Turnover Average Total Assets *

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Gross profit margin

* (Beg Assets + End Assets) 2 Net Sales – Cost of Goods Sold Net Sales Or Gross profit Net Sales

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Net profit margin

Net profit after tax Net Sales

-Measures a company’s efficiency in using its total assets to generate sales. -Measures the ability of the company to earn gross profit out of sales - the higher the ratio the better it is. - Reasons: Better sales or lower Cost of goods sold by controlling cost (buy in bulk) -Measures the ability of the company to

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earn net profit out of sales - the higher the ratio the better it is. - Reasons: Better sales or lower Cost of goods sold or lower operating expenses by controlling cost (buy in bulk) or controlling operating expenses. 29

Return on Shareholders’ Equity

Net Profit after tax – Pref Dividends Average Ordinary Shareholders’ Equity

-Ability to earn profit utilising the shareholders’ funds -The higher the better.

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Return on Total Assets

Net profit after tax Average total assets

-Ability to earn profit by managing the total assets -The higher the better - Sometimes the ratio is low, reason is because the firm carries too many idle assets ie assets that are not effective, not revenue-generating. It might be good to get rid of them.

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