Ratio
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Transcript of Ratio
Presented By : Mai Fouad
1- Liquidity ratio السيولة نسبة
2- Activity ratio / الفعالية النشاط نسبة
3- Leverage ratio المديونية نسبة
4- Profitability ratio الربحية نسبة
Balance sheet
Financial position of the firm at given point of time
Assets = Liabilities + owners’ equity
Income statement
Financial summary of the firm’s operating
results during specific period
RatiosAnd analysis for Financial Statement
Liquidity Ratios:
The liquidity of the firm measured by it’s ability to satisfy it’s short term obligation and it represent financial position in other word can Company pay it’s bills
Current Ratio: (%) C/R = Current assets
Current Liabilities
The higher C/R , The more liquid the firm
( Higher – Better )
Cont. Liquidity Ratio in Personal Finance
Individuals like Corporation can use financial Ratio to analysis
Example :
Ahmed el Hosiny s’ total liquid assets 2225 L.E and he has total current debts 21539 L.E ( Loan – Mortgage payment – Car loan )
C/R = 2225 = 0.1033 * 100% = 10.3%
21539
Cont. Liquidity Ratios:
Quick Ratio :
Quick Ratio like similar to current Ratio except it’s excludes Inventory
( It low liquidity – can’t sold easily – Inventory in common sold in Credit )
Quick Ratio = Current assets – Inv.
Current liabilities
Which Better C/R - Quick Ratio ?
Activity Ratio
1) Inventory Turnover :
Measures activity , liquidity of firm’s inventory which means Measures the speed of converting inventory into sales.
Inventory Turnover =
Cost of Goods sold ( COGS )
Inventory
If inventory turnover=2, this means that the firm changes inventory 2 times a year
Average payment period :
It means average age of accounts payable
APP= AP
Average purchase per day
= AP
annual purchase/360
If APP is 50, it takes the firm 50 days to pay an AP.
2) Average Collection Period :
Is useful in evaluating credit and collection Policies
Average Collection period =
Account Receivable
Annual Sales / 360 days
Very Important Note:
ACPShould be Less than
APP
It indicates the efficiency with which the firm uses its assets to generate sales.
Total assets turnover=
sales
total assets If total assets turnover is 0.5, the firm
turns over its assets 0.5 times a year or (every $1 invested in assets generate $0.5)
The higher this ratio ,the more efficient the firm’ s assets have been used .
3)Leverage ratio:
The higher the portion of borrowed funds to owner-contributed funds, the greater the assumed risk to lenders.
Leverage ratios Debt equity ratio:
Indicates how well the shareholders’ investment in the company provides cushion for assets shrinkage.
Measures how much the shareholders have a risk (capital structure).
Debt to equity ratio =
total liabilities
total assets
Cont. Leverage ratios Times Interest Earned Ratio:
sometimes called the interest coverage ratio,
Measures the firm’s ability to make contractual interest payments. The higher its value, the better able the firm is to fulfill its interest obligations.
Times Interest Earned Ratio=
Earnings before interest and taxes
Interest expense
4 .Profitability ratio
Measures the company’s ability to sell its products or provide a service at a price that exceeds its expenses.
Gross Profit Margin (%)
It measures the percentage of each sales dollar remaining after the firm has paid for its goods.
GPM = Sales – cost of goods sold
sales.
= Gross Profit
sales.
A higher GPM , better
Operating Profit Margin)%(
It measures the percentage of each sales dollar remaining after all costs and expenses other than interest, taxes, and preferred stock dividends are deducted.
OPM=Operating Profits (EBIT)
sales
A higher OPM , better
Net Profit Margin
It measures the percentage of each sales dollar remaining after all costs and expenses including interest, taxes, and PS dividends are deducted.
NPM= earnings available to CS
sales
A higher NPM , better
Earning per share
It represents the number of dollars earned during the period on behalf outstanding shares of CS.
EPS=
earnings available to CS
number of shares of CS outstanding.
A high EPS , better
Return on total assets (ROA)
It measures the overall effectiveness of the firm in generating profits from available assets.
It’s called return on investment.
ROA=
earnings available to CS
total assets
If ROA is 7% this means that the firm earns 7 cents on each dollar invested in total assets during the past years.
Return on common equity (ROE)
It measures the return earned on the common stockholder’s investment in the firm.
ROE=earnings available to CS
common stock equity.
If ROE is 12% this means that the firm earns 12 cents on each dollar in common stock equity during the past year.
A high ROE , better.
Case Study
Game Cont. Objective:
Getting into the vault without your faces being detected by any security camera
What you have:
5 Socks A Spoon A DODGE RAM vehicle
Electric Shocker 3 Suits A mobile phone
What they have:
Guards with guns (the blue dots)
Metal Detector on front entrance
Vault that only opens with the eye scan of the manager