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7/30/2019 BA 141 Ratios
1/14
8/3/20
` To assess a firms financial condition anderformance
` It is of interest to shareholders, creditors,regulators and the firms own management
` Ratios can standardize F/S information and makeit possible to compare companies of varying sizes
1Ratios Practice Problems
` Anyone can crunch the numbers and generate theratiosthe real skill is uttin life into thenumbers
` Establish the perspective / purpose of your analysis
` Benchmarks
Industry
Internal past
2
Internal forecast
Ratios Practice Problems
7/30/2019 BA 141 Ratios
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` Ratios must be considered together: a single ratiob itself is racticall meanin less
` Compare apples vs. apples: use F/S of companiesthat cover the same time period
` Use audited F/S whenever possible
` Garbage in, garbage out: the financial data beingcompared should have been developed in the same
3
way
Ratios Practice Problems
` Be wary of inflation distortions
.
A core set of 20 to 25 ratios will usually provide you withjust about the same important information that 100 ratioswill give you
4Ratios Practice Problems
7/30/2019 BA 141 Ratios
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` Balance Sheet Quality
Hidden liabilities
Hidden assets
Off balance sheet financing
5Ratios Practice Problems
` Earnings Quality
Establishment of reserves
Amortization of intangible assets
Including all losses and debt
Pro forma profitability measures
6Ratios Practice Problems
7/30/2019 BA 141 Ratios
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` Problems Caused by Inflation
Choice of inventory valuation methods
x LIFO
x FIFO
Rising interest rates causing a decline in the value of long-term debt
7
Recognition of sales
Ratios Practice Problems
Operating IncomeOperating Profit Margin =
Operating IncomeROA
Ave. Total Assets=
Net IncomeNet Profit Margin
Sales=
8
ROEAve. SHE=
Net IncomeEPS
Wtd. Ave. C/S Outstanding=
Ratios Practice Problems
7/30/2019 BA 141 Ratios
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Cost of Goods SoldInventory Turnover =
ve. nven or es
360 daysDays Inventory
Inventory Turnover=
Credit SalesA/R Turnover
Average A/R=
9
360 daysAve. Collection Period
A/R Turnover
=
Ratios Practice Problems
Cost of Goods SoldA/P Turnover =
Gross ProfitGP Margin
Sales=
360 daysAve. Payment Period
A/P Turnover=
ve.
10
Marketing & Admin ExpOperating Cost RatioSales
=
Ratios Practice Problems
7/30/2019 BA 141 Ratios
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SalesFixed Asset Turnover =
Net SalesEquity Turnover
Ave. Equity=
ve. xe sse s
SalesTotal Asset Turnover
Ave. Total Assets=
11Ratios Practice Problems
EBITInterest Coverage =
Total LiabilitiesDebt Equity Ratio
Total Equity=
CFO Debt Interest Lease InterestCash Flow Coverage
Debt Interest Lease Interest
+ +=
+
12
Total LiabilitiesDebt Asset Ratio
Total Assets=
Ratios Practice Problems
7/30/2019 BA 141 Ratios
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Current AssetsCurrent Ratio =
Cash Marketable Securities A/RQuick Ratio
Current Liabilities
+ +=
CFOCash Flow to LTD
BV of LTD PV of Operating Lease=
+
13Ratios Practice Problems
Cash Flow to Total Interest-Bearing Debt
CFO=
Total LTD Current Interest-Bearing Liabilities+
1Net Income Net Income
t t
1
1
1
Net IncomeDOL
Sales Sales
Sales
t
t t
t
=
14Ratios Practice Problems
7/30/2019 BA 141 Ratios
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Stock Market PriceP/E Ratio
EPS= TobinsQ isnamed
aftertheeconomistMarket Value of Equity
Market Book RatioBook Value of Equity
=
MV Equity MV DebtTobin's Q
Replacement Cost of All Assets
+=
ames o n. era oisusefulforpredicting
futureinvestmentactivity:firmsandindustrieswithaq
ratio>1havean
incentivetoinvestsince
themarkets
15
Dividend Yield
Market Price per Share=
Ratios Practice Problems
isgreaterthanthecost
oftheinvestment.
Dividends Per ShareDividend Payout
EPS=
Operating CFCash Flow per Share =
Stock Market PricePrice / CF
Cash Flow per Share=
Market Cap Market Price per Share Outstanding C/Sx=
16Ratios Practice Problems
( ) ( )0 1n
nx x g= +
1
0
1n
nx
gx
=
CompoundAnnualGrowthRate(CAGR)
7/30/2019 BA 141 Ratios
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Net income Net income Sales AssetsROE = = x x
Profitability
/ Efficiency Leverage
Cost Control
Net income Net income EBT EBIT Sales Assets
17
Equity EBT EBIT Sales Assets Equity
x x x x= =
Tax Retention Interest Operating Efficiency Leverage
Rate Burden Profit Margin
Ratios Practice Problems
` Common size Balance Sheet:
Total Assets = 100%
` Common size Income Statement
All items as a % of Total Revenues
Total Revenues = 100%
18Ratios Practice Problems
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` Trend Analysis
Year to year changes
20Ratios Practice Problems
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` Trend analysis 20X0 X1 X2
XYZ current ratio 1.9 2.2 2.3
` Cross-sectional analysis 20X2
XYZ current ratio 2.3
Industry norms 2.5
` Both simultaneously 20X0 X1 X2
21Ratios Practice Problems
XYZ current ratio 1.9 2.2 2.3
Industry norms 2.5 2.4 2.5
` Leverage Ratios
For ualif in Ca ital refer to BSP Circular 538 - Risk Based Ca ital,Adequacy Framework for the Philippine Banking System
Tier 1 Capital Tier 2 CapitalCAR=
Risk Weighted
+
EquityProxy for CAR
Total Assets=
22
EquityEquity to Loans Ratio
Customer Loan Receivables=
Ratios Practice Problems
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` Liquidity Ratios
Quasi-Liquid AssetsQLAR
Total Assets=
Customer Loan ReceivablesLoans to Deposit
Total Deposit Liabilities=
23Ratios Practice Problems
` Quasi-Liquid Assets
Cash and other cash items
Due from BSP
Due from other banks
Interbank loans receivable and securities purchased under agreements toresell
Trading securities (i.e. FVTPL)
Investment securities : Available-for-Sale (AFS)
Investment securities : Held-to-Maturity (HTM)
24Ratios Practice Problems
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` Coverage Ratios
Allowance for Doubtful AccountsCoverage Ratio
Non-Performing Loans, gross=
Non-Performing Loans, grossNPL Ratio
Total Loans, gross=
25
on- er orm ng oans, gross
Fair Value of Collateral
Ratios Practice Problems
` Coverage Ratios
Restructured LoansRate of Restructured Loans
Total Loans, gross=
NPL Restructured LoansProblematic Loan Ratio
Total Loans, gross
+=
26
Non-Performing Asset RatioTotal Loans, gross=
Ratios Practice Problems
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` Profitability Ratios
e n eres ncomeNet Interest Margin
Earning Assets=
Operating ExpensesCost to Income Ratio
Net Interest Income Other Income=
+
Operating ExpensesCost Margin
Ave. Total Assets=
27
( ) ( )NI Interest Expense 1 tax rate
ROTA Ave. Total Assets
+ =
Net IncomeROTE
Ave. SHE=
Ratios Practice Problems
` Earning Assets
Due from BSP
Due from other banks
Interbank loans receivables and securities purchased under agreements toresell
Trading securities (i.e. FVTPL)
Investment securities : Available-for-Sale (AFS)
Loan Receivables and Advances
` Note: Cash in itself is NOT an earnin asset
28
Ratios Practice Problems
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