36196831 22902527 Financial Ratio Analysis Infosys Presentation
Presentation on Ratio analysis
-
date post
12-Sep-2014 -
Category
Economy & Finance
-
view
5.546 -
download
1
description
Transcript of Presentation on Ratio analysis
NORTHERN UNIVERSITY B A N G L A D E S H
Presentation on:
Ratio analysis
Md. Zamanur RahmanAsst. Professor
Department of BBANorthern University Bangladesh
Presented To:
Prepared By
Department of BBA
JAKIR KHAN
Ratio analysisRatio analysis is used to evaluate relationships among financial statement items. The ratios are used to identify trends over time for one company or to compare two or more companies at one point in time. Financial statement ratio analysis focuses on three key aspects of a business:
i. Liquidityii. Profitabilityiii. Solvency.
Liquidity ratios:Liquidity ratios measure the ability of a company to repay its short-term debts and meet unexpected cash needs.
Current ratio: The current ratio is also called the working capital ratio, as working capital is the difference between current assets and current liabilities. This ratio measures the ability of a company to pay its current obligations using current assets. The current ratio is calculated by dividing current assets by current liabilities.
2011 2010
Current assets $38,366 $38,294
Current liabilities 27,945 30,347
Current ratio 1.4 : 1 1.3 : 1
This ratio indicates the company has more current assets than current liabilities. Different industries have different levels of expected liquidity. Whether the ratio is considered adequate coverage depends on the type of business, the components of its current assets, and the ability of the company to generate cash from its receivables and by selling inventory.
Acid-test ratio. The acid-test ratio is also called the quick ratio. Quick assets are defined as cash, marketable (or short-term) securities, and accounts receivable and notes receivable, net of the allowances for doubtful accounts. These assets are considered to be very liquid (easy to obtain cash from the assets) and therefore, available for immediate use to pay obligations. The acid-test ratio is calculated by dividing quick assets by current liabilities.
2011 2010
Cash $6,950 $6,330
Accounts receivable, net 18,567 19,230
Quick Assets $25,517 $25,560
Current Liabilities $27,945 $30,347
Acid-test ratio .9 : 1 .8 : 1
The traditional rule of thumb for this ratio has been 1:1. Anything below this level requires further analysis of receivables to understand how often the company turns them into cash. It may also indicate the company needs to establish a line of credit with a financial institution to ensure the company has access to cash when it needs to pay its obligations.
Receivables turnover:. The receivable turnover ratio calculates the number of times in an operating cycle (normally one year) the company collects its receivable balance. It is calculated by dividing net credit sales by the average net receivables. Net credit sales is net sales less cash sales. If cash sales are unknown, use net sales. Average net receivables is usually the balance of net receivables at the beginning of the year plus the balance of net receivables at the end of the year divided by two. If the company is cyclical, an average calculated on a reasonable basis for the company's operations should be used such as monthly or quarterly.
2011 2010 2009
Net credit sales $129,000 $97,000
Accounts receivable 18,567 19,230 $17,599
Average receivables (18,567+19,230)/2= (19,230+17,599)/2=
18,898.5 18,414.5
Receivables turnover $129,00/$18,898.5 = $97,00/$18,414.5 =
6.8 times 5.3 times
Calculation of Receivables Turnover
Inventory turnover: The inventory turnover ratio measures the number of times the company sells its inventory during the period. It is calculated by dividing the cost of goods sold by average inventory. Average inventory is calculated by adding beginning inventory and ending inventory and dividing by 2. If the company is cyclical, an average calculated on a reasonable basis for the company's operations should be used such as monthly or quarterly.
2011 2010 2009
Cost of goods sold $70,950 $59,740
Inventory 12,309 12,202 $12,102
Average inventory (12,309+12,202)/2= (12,202+12,102)/2=
12,255.5 12,152
Inventory turnover
$70,950/$12,255.5= $59,740/$12,152=
5.8 times 4.9 times
Profitability ratios:
Profitability ratios measure a company's operating efficiency, including its ability to generate income and therefore, cash flow. Cash flow affects the company's ability to obtain debt and equity financing.
Profit margin: The profit margin ratio, also known as the operating performance ratio, measures the company's ability to turn its sales into net income. To evaluate the profit margin, it must be compared to competitors and industry statistics. It is calculated by dividing net income by net sales.
2011 2010
Net income/(loss) $ 8,130
Net sales 129,000
Profit margin 6.3% (1.4%)
Asset turnover: The asset turnover ratio measures how efficiently a company is using its assets. The turnover value varies by industry. It is calculated by dividing net sales by average total assets.
2011 2010 2009
Net sales $129,000 $97,000
Total assets 114,538 118,732 $102,750
Average total assets (114,538+118,732)/2= (118,732+102,750)/2=
116,635 110,741
Asset turnover $129,00/$116,635= $97,00/$110,741 =
1.1 times .9 times
Return on assets: The return on assets ratio (ROA) is considered an overall measure of profitability. It measures how much net income was generated for each $1 of assets the company has. ROA is a combination of the profit margin ratio and the asset turnover ratio. It can be calculated separately by dividing net income by average total assets or by multiplying the profit margin ratio times the asset turnover ratio.
The information shown in equation format can also be shown as follows:
2011 2010 2011 2010
Net income/(loss) $ 8,130 $(1,400) Profit margin 6.3% (1.4%)
Average total assets 116,635 110,741 Asset turnover
1.1 times .9 times
Return on assets 6.97% (1.3%) Return on assets
6.93% * (1.3%)
Return on common stockholders' equity. The return on common stockholders' equity (ROE) measures how much net income was earned relative to each dollar of common stockholders' equity. It is calculated by dividing net income by average common stockholders' equity. In a simple capital structure (only common stock outstanding), average common stockholders' equity is the average of the beginning and ending stockholders' equity.
Calculation of Return on Common Stockholders' Equity 2011 2010 2009
Net income/(loss) $ 8,130 $ (1,400)
Total stockholders' equity
71,593 65,385 $68,080
Average stockholders' equity
(71,593+65,385)/2= (65,385+68,080)/2=
68,489 66,732.5
Return on common stockholders' equity
$8,130/$68,489= $(1,400)/$66,732.5=
11.9% (2.1%)
Return on preferred stockholders' equity.
Solvency ratiosSolvency ratios are used to measure long-term risk and are of interest to long-term creditors and stockholders.
Debt to total assets ratio. The debt to total assets ratio calculates the percent of assets provided by creditors. It is calculated by dividing total debt by total assets. Total debt is the same as total liabilities.
2011 2010
Current liabilities $27,945 $ 30,347
Long-term debt 15,000 23,000
Total debt $ 42,945 $ 53,347
Total assets $114,538 $118,732
Debt to total assets 37.5% 44.9%
The 2011 ratio of 37.5% means that creditors have provided 37.5% of the company's financing for its assets and the stockholders have provided 62.5%.
Times interest earned ratio: The times interest earned ratio is an indicator of the company's ability to pay interest as it comes due. It is calculated by dividing earnings before interest and taxes (EBIT) by interest expense.
2011 2010
Income before interest expense and income taxesIncome (loss) before taxes $13,550 $(2,295)
Interest expense 1,900 1,500
EBIT $15,450 $ (795)
Interest Expense $ 1,900 $ 1,500
Times interest earned 8.1 times
N/M
A times interest earned ratio of 2–3 or more indicates that interest expense should reasonably be covered. If the times interest earned ratio is less than two it will be difficult to find a bank to loan money to the business.
Thank You Everybody