FinancialStatementsAnalysisChapter3-1

KeyConceptsandSkillsKnowhowtocomputeandinterpretimportantfinancialratios

ChapterOutline3.1FinancialStatementsAnalysis3.2RatioAnalysis3.3TheDuPontIdentity

3.2RatioAnalysisRatiosalsoallowforbettercomparisonthroughtimeorbetweencompanies.Aswelookateachratio,askyourself:Howistheratiocomputed?Whatistheratiotryingtomeasureandwhy?Whatistheunitofmeasurement?Whatdoesthevalueindicate?Howcanweimprovethecompany’sratio?

CategoriesofFinancialRatiosShort-termsolvencyorliquidityratiosLong-termsolvencyorfinancialleverageratiosAssetmanagementorturnoverratiosProfitabilityratiosMarketvalueratios

ComputingLiquidityRatiosCurrentRatio=CA/CL708/540=1.31timesAbsentsomeextraordinarycircumstances,wewouldexpecttoseeacurrentratioofatleast1.QuickRatio=(CA–Inventory)/CL(708-422)/540=.53timesWal-Mart’squickratiowasonly.13,andManpower’swas1.37,almostthesameasitscurrentratio.CashRatio=Cash/CL98/540=.18times

ComputingLeverageRatiosTotalDebtRatio=(TA–TE)/TA(3588-2591)/3588=28%Debt/Equity=TD/TE(3588–2591)/2591=38.5%EquityMultiplier=TA/TE=1+D/E=1+.385=1.385

ComputingCoverageRatiosTimesInterestEarned=EBIT/Interest691/141=4.9timesCashCoverage=(EBIT+Depreciation+Amortization)/Interest(691+276)/141=6.9times

ComputingInventoryRatiosInventoryTurnover=CostofGoodsSold/Inventory1344/422=3.2timesDays’SalesinInventory=365/InventoryTurnover365/3.2=114days↑↓

ComputingReceivablesRatiosReceivablesTurnover=Sales/AccountsReceivable2311/188=12.3timesDays’SalesinReceivables=365/ReceivablesTurnover365/12.3=30days↑↓

ComputingTotalAssetTurnoverTotalAssetTurnover=Sales/TotalAssets2311/3588=.64timesItisnotunusualforTAT1,especiallyifafirmhasalargeamountoffixedassets.

ComputingProfitabi