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Chapter 3 Ratios

by: Chris Holder

Chapter 3 Ratios FIN 315

Marketplace > Finance > FIN 315 > Chapter 3 Ratios
Chris Holder
GPA 3.28

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Hey Guys, These notes cover ratio analysis what we discussed on Tuesday. On the last page is the information from Thursday on ways to look at Ratios. These note cover the definition, and formula ...
Business Finance
Dr. Milanese
Class Notes
FIN 315, Ratios, Milanese
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This 4 page Class Notes was uploaded by Chris Holder on Friday January 29, 2016. The Class Notes belongs to FIN 315 at a university taught by Dr. Milanese in Spring 2016. Since its upload, it has received 46 views.


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Date Created: 01/29/16
Chapter 3: Part 2 Financial Statements and Ratios Analysis Ratio Analysis *highlyvocabularyandequationbasedchapter 1. Ratios a. LiquidityRatios i. CurrentRatio ii. QuickRatio b. ActivityRatios i. InventoryTurnover ii. AverageCollectionPeriod iii. AveragePaymentPeriod iv. Total AssetTurnover c. DebtRatios i. DebtRatio ii. FinancialLeverage iii. Debt-To-EquityRatio iv. TimesInterestEarnedRatio d. ProfitabilityRatiosdef. i. Gross ProfitMargin ii. OperatingProfitMargin iii. NetProfitMargin iv. Returnon totalassets(ROA) v. Returnon equity(ROE) e. Market Ratios i. Price/Earnings(P/E)Ratio ii. Market/Book(M/B)Ratio Liquidityratios (liquiditymeanshoweasilyassetsofacompanycan beturnedintocash to satisfyshort- termobligationslikebills.) Currentratio ???????????????????????????? ????????????????????: ahighercurrentratio indicatesagreaterdegreeofliquidity ???????????????????????????????????????????????????????????????????????? [CurrentassetsCash Money($$$), Market securities,Acc.Rec.,Inventory] ????????−???????????????????????????????????? QuickRatio ???????? : ameasureofliquidity,similartocurrentratio,butexcludesinventory (usuallytheleastcurrentasset) ActivityRatios: Inventory Turnover ????????????????  $15 = 5.0???? turnoverof inventory ???????????????????????????????????? $3 Average Collection Period ????????????.????????????. $600,000 = ???????????????????????????? ???????????????????????????????????????? 20,000= 30???????????????? On average, it takes the firm 30days to collect an account receivable The average time it take afterasale foryou to get paid. Total Asset Turnover ???????????????????? $2???????????? = = 2.0 ???????????????????? ???????????????????????? $1???????????? The company turns overits assets 2.0times peryear ???????????????????? ???????????????????? ???????????????????????? Indicatestheefficiencywithwhichthefirmusesitsassetstogeneratesales Debt Ratio ???????????????? $???????????????? = = ????.???????? ???????????????????????? $???????????????????? “How muchdebt is the company using and how well suited are they to service that debt?” FinancialLeverage:def;is themagnificationofriskandreturn($) throughtheuse offixed-costfinancing (debt and preferred stock). DebttoEquityRatio debt equity TIE Times interest earned: see book formore details. Profitability Ratios Gross profitmargin:representsthepercentageof eachsalesdollarremainingafterthepaymentof goods. ???????????????????? − ???????????????? ???????????????????????????? ???????????????? ???????????????????? ???????????????????????? ???????????????????? ???????????????????????? ???????????????????????? = = ???????????????????? ???????????????????? OperatingProfitMargin:def. ???????????????????????????????????? ???????????????????????????? ???????????????????????????????????? ???????????????????????? ???????????????????????? = ???????????????????? NetProfitMargin,def. ???????????? ???????????????????????? ???????????????????????? = ???????????????????????????????? ???????????????????????????????????????????????????????????????????????? ????????????????????ℎ???????????????????????? ???????????????????? ROA:Returnon Total Assets,AKAReturnonInvestment(ROI) Measurestheoveralleffectivenessofmanagementingeneratingprofitswithitsavailableassets. ???????????? ????????????????????????= $10???????????? = 0.20 ???????????????????????? $50???????????? ROE: Returnon Equity Returnon Equitymeasuresthereturnearnedonthecommonstockholder’sinvestment.Thehigherthe betterforstockholders. ???????????? ???????????????????????? ???????????????????????? Market Ratios Price/Earnings (P/E)ratio: measuresthepercentageamountofmoneythatinvestorsofafirmare willingtopayforeach dollarofitsearnings.Thelevelofthisratioindicatesthedegreeof confidence that investorshaveinafirm’sfutureperformance,thehighertheratio,thegreaterthe investor confidence. ???? = (???????????????????????????????????????????????????????? ???????????????????????????????????????????????? $????????( ) ???? ???????????? ???????????????????????? $???????? ???????????? ???????????????????????????????????????????? ????????????????????= ???????????????????????? ???????????????????????????????????????????? = (???? ???????????? ????????????????????????)= ($????.????????/????????????????????) ???? $???????? ???? = $????.???????? = ???????????? MarketBookRatio orBook Ratio(M/B) Market ratioscomparethefirm’smarketvalue,asmeasurebyitscurrent sharepricecomparedto the market.Theseratiosgiveinsightintohowinvestorsinthe marketplacebelievethatafirmisdoingin termsof riskand return. ???? $???????? = = ????????.???? ???? $????.????????  M=market price(i.e$25),  B= BookValuepershare( $40 mil/$20 milshares= $2.00 per share  *The Market Ratio Chapter 3 Final Notes: Financial Analysis Ways to lookat ratios: CrossSectionalAnalysis:Whenwecomparefirmratiosw/theindustryaverage Benchmarking:comparingyouraverageratioswithcompaniesthataresimilartoyourowncompany. Trend-Analysis:comparingcompanyratiosovertime. *Just becauseacompanyis theSTAR ofan industry,doesn’tmeanit’sgoodtoinvest. TheStar ofaDyingIndustry!Don’talwaystrustthe numbers.AsthisisaFinancecourse,weand investorsmustthinknotonlyabouttheAccounting,butalsoconsidertheEconomicsinvolvedinan investment.


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