MGT 497 Financial, Trends, Ratios

Prof. Rick Hayes, Ph.D., CPA

Game Weighting Factors

• Return on Assets (ROA) • Return on Equity (ROE)• Market Share (MS)• Stock Price (SP)• Unit Production Costs

(UPC)• Total Net Income (TNI)

Return on Assets (ROA)Return on

Total Assets

Average Net Income Yr 3 thru 6

Average Year End Assets Yrs 3 thru 6=

This ratio measures how well assets have been employed.

Return on EquityReturn on

Equity

Average Net Income Yrs 3 thru 6

Average Shareholders’ Equity Yrs 3 thru 6

=

This ratio measures the ability of management to generate net income from

the resources the owners provide.

Market Share, Stock Price, Unit Production Cost

Market Share

Total Company Dollar Sales Yrs 3 t 6

Total Industry Dollar Sales Yrs 3 thru 6=

Stock Price = Average Year end stock Price Years 3 thru 6

Unit Production Cost (UPC) = Average Unit Production Cost Years 3 thru 6

Total Net Income (TNI) = Sum of Net Income for Years 3 thru 6

Ratios Liquidity: Current Ratio

Quick Ratio

Leverage: Debt to Equity Times Interest Earned (Times Covered)Debt to Assets

Profitability:Net/Gross profit marginsReturn on Invested Capital (ROIC)Return on Total Assets (ROA)Return on Shareholder’s Equity (ROE)

Activity: Days Sales Outstanding (DSO)Inventory Turnover

Shareholder : Total Shareholder Returns Returns Price Earnings Ratio (P/E)

Dividend Yield

Liquidity Ratios

=Current ratioCurrent assets

Current liabilities

Measures a company’s ability to satisfy its short-term liabilities

=Acid-test ratioQuick assets

Current liabilities

Provides a more stringent indication of a company’s ability to pay its current

liabilities

Leverage Ratios

=Debt to equity ratio

Total liabilities

Shareholders’ equity

Indicates the extent of reliance on creditors, rather than owners, in providing

resources

=Times interest earned ratio

Net income + Interest expense + Taxes

Interest expense

Indicates the margin of safety provided to creditors

Profit Margin on Sales

Profit Margin

on Sales

Net Income

Net Sales=

This ratio indicates the portion of each dollar of revenue that is available to cover expenses.

Profit RatiosProfit RatiosProfit RatiosProfit Ratios

Return on Total AssetsReturn on

Total Assets

Net Income

Average Total Assets=

This ratio measures how well assets have been employed.

Profit RatiosProfit RatiosProfit RatiosProfit Ratios

Net income

Total assets= Return on assets

Net Profit

Invested Capital=

Return on Invested Capital

Return on EquityReturn on

Equity

Net Income

Average Shareholders’ Equity=

This ratio measures the ability of management to generate net income from

the resources the owners provide.

Receivables Turnover Ratio

Whenever a ratio divides an income statement balance by a balance sheet balance, the average

for the year is used in the denominator.

Net Sales Average Accounts Receivable

ReceivablesTurnover

Ratio=

This ratio measures how many times a company converts its

receivables into cash each year.

Days Sales Outstanding or Average Collection Period

This ratio is an approximation of the number of days the average accounts

receivable balance is outstanding.

365 Receivables Turnover Ratio

Average Collection

Period=

Inventory Turnover Ratio

This ratio measures the numberof times merchandise inventory

is sold and replaced during the year.

Cost of Goods Sold Average Inventory

InventoryTurnover

Ratio=

Average Days in Inventory

This ratio indicates the numberof days it normally takes to sell inventory.

365 Inventory Turnover Ratio

Average Days in

Inventory=

Number of shares outstanding× Number of months outstanding ÷ 12 Weighted average shares outstanding

Number of shares outstanding× Number of months outstanding ÷ 12 Weighted average shares outstanding

Simple Capital Structure(Basic EPS)

Basic Earnings Per Share

Net income (after tax) – Preferred dividends*Weighted average outstanding common stock Net income (after tax) – Preferred dividends*Weighted average outstanding common stock

*Current period’s cumulative preferred stock period’s cumulative preferred stock dividends (whether or not declared) and dividends (whether or not declared) and noncumulative preferred stock dividends noncumulative preferred stock dividends

(only if declared).(only if declared).

*Current period’s cumulative preferred stock period’s cumulative preferred stock dividends (whether or not declared) and dividends (whether or not declared) and noncumulative preferred stock dividends noncumulative preferred stock dividends

(only if declared).(only if declared).

Market price per share

Earnings per share=

Price-Earnings Ratio

Dividend per share

Market price per share= Dividend Yield

Shareholder Return RatiosShareholder Return RatiosShareholder Return RatiosShareholder Return Ratios