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LIQUIDITY RATIO
used to measure
the firm’s ability to
pay is short- term
debts as they fall
due.
ACTIVITY RATIO
used to measure
the ease or speed of
converting various
accounts into cash
or sales.
DEBT RATIO
used to measure
the degree of
indebtedness of the
firm ands its ability
to service its debts.
PROFITABILITY RATIO
used to show the
combined effects of
liquidity, asset
management, and
debt management
on operating
results.
The firm’s
earnings are
evaluated in
relation to assets
sales, owner’s
investment or share
value.
PROFITABILITY RATIO
Liquidity RATIO
Current Ratio
Quick/Acid Test Ratio
Cash Ratio
Current Ratio
Current Ratio=
Current Asset
Current Liabilities
2, 800,000
1,500,000
= 1.87
Quick or acid test Ratio
Quick or Acid
Test Ratio =
Current Asset -
Inventories
Current Liabilities
2, 800,000 -
800,000
1,500,000
= 1.93
Quick or acid test Ratio
Quick or Acid
Test Ratio =
cash + Receivables+
marketable securities
Current Liabilities
300,000+1,000,000
+ 700,000
1,500,000
= 1.93
Cash Ratio
Cash Ratio =
Cash + Marketable
Securities
Current Liabilities
300,000 +
700,000
1,500,000
= 0.67
Activity RATIO
Inventory Turnover
Average Collection
Period
Average Payment
Period
Total Asset Turnover
Inventory turnover
Inventory
Turnover =
Cost of Good Sold
Inventory
2, 000,000
800,000
= 2.5
Inventory turnover
Average
Inventory =
Age
No. of days in a
year
Inventory
Turnover
360 days
2.5
= 144 days
Average collection period
Average
Collection=
Period
Accounts
Receivable
Sales/day
average
1, 000,000
= 97.3 days
Annual Sales
divided by 360
days
3,700,000/
360 days
Average payment period
Average
Payment =
Period
Accounts
Payable
Average
Purchases/day
700,000
= 180 days
Annual
Purchases
divided by 360
days
(0.70x 2,000)/
360 days
Total asset turnover
Total Asset =
Turnover
Sales
Total Assets
3,700,000
4,800,000
= 0.77
Fixed asset turnover
Fixed Asset =
Turnover
Sales
Net Fixed
Assets
3,700,000
2,000,000
= 1.85
Debt/ debt management RATIO
Debt Ratio
Debt-to-Equity Ratio
Time Interest Earned
Ratio
Debt ratio
Debt Ratio=
Total Liabilities
Total Assets
2,700,000
4,800,000
= 0.56
Debt-to-equity ratio
Debt-to-
Equity =
Ratio
Long term debt
Stockholders’ Equity
1,200,000
2,100,000
= 0.57
Interest
expense
Time interest earned ratio
Time
Interest =
Earned
Ratio
EBIT (Operating
Profits)
Interest
1,150,000
150,000
= 7.67
Profitability RATIO
Net Profit Margin
Gross Profit Margin
Operating Profit
Margin
Return on Asset(ROA)
Profitability RATIO
Return on Equity(ROE)
Earning Per
Share(EPS)
Price/Earnings(PE)
Ratio
Net profit margin
Net Profit
Margin =
Net Profit margin
after taxes
Net sales
680,000
3,700,000
= 0.18
Gross profit margin
Gross Profit
Margin =
Net Profit margin
after taxes
Net sales
1,700,000
3,700,000
= 0.46
operating profit margin
Operating
Profit
Margin =
Operating Profits
Net sales
1,150,000
3,700,000
= 0.31
Return on asset(ROA)/ Return on Investment(ROI)
Return on
Asset =
Net Profit after
taxes
Total Assets
680,000
4,800,000
= 0.14
Return on Equity (Roe)
Return on
Equity =
Net Profit after
taxes
Shareholders’
Equity
680,000
2,100,000
=0.32
Earnings per share(EPS)
Time
Interest =
Earned
Ratio
Earnings available
for common
stockholders
No. Of shares of
common stock
outstanding
660,000
100,000
= 6.6 per share
PRICE/Earnings (PE) ratio
Price
Earning =
Ratio
Price per Share(@
market Price)
Earnings per
share
33 (@ market
price)
6.6 per
share
= 5 times
DuPont SYSTEM of analysis
What Does DuPont Identity Mean?An expression that
breaks return on equity (ROE) down into three parts: profit margin, total asset turnover and financial leverage. It is also known as "DuPont Analysis".
DuPont SYSTEM of analysisDuPont identity tells us that ROE is
affected by three things:
Operating efficiency, which is measured
by profit margin
Asset use efficiency, which is measured
by total asset turnover
Financial leverage, which is measured by
the equity multiplier
ROE = Profit Margin (Profit/Sales) * Total
Asset Turnover (Sales/Assets) * Equity
Multiplier (Assets/Equity)
DuPont SYSTEM of analysis
ROA = Net Profit Margin
(Profit/Sales) * Total Asset
Turnover (Sales/Assets)
DuPont SYSTEM of analysis
ROE = Profit Margin
(Profit/Sales) * Total Asset
Turnover (Sales/Assets) *
Equity Multiplier
(Assets/Equity)
DuPont SYSTEM of analysis
ROA =
Net Profit
after Taxes680,000
x
Sales
Total asset
3,700,00
4,800,000Sales3,700,000
=
680,000
4,800,000
= 0.14
Financial Leverage Multiplier
The degree to which an investor or businessis utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Financial leverage is not always bad, however; it can increase the shareholders' return on investment and often there are taxadvantages associated with borrowing. also called leverage.
DuPont SYSTEM of analysis
ROE =
Net Profit
after Taxes680,000
x
Total Assets
Stockholders’
Equity
4,800,00
2,100,000Total Assets4,800,000
=
680,000
2,100,000
= 0.32
Thank you for listening!!!
^^
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