- 1. Design a blended learning environmentCourse: Introduction to Financial Management.Topic: The analysis and applications of financial ratios in FS.Target audience: DSM Students Semester 3Learning outcomes:Learners are able to define a type of Financial Statements likes Trading Account, Profit and Loss Account and Balance Sheets Account. Learners are able to analyze and applied all the five broad categories of ratios that have been used by Financial Analyst to analyze financial stability of the organization.Introduction The accounting data from the Financial statements will help the analysts to interpret and evaluate the firms performance -Financial ratio will allow the analysis to create comparable measures of a firms financial data across time (trend analysis) and with other firms within the same industry (cross sectional analysis) in order to locate the symptoms. -Thus the analysis must determine the cause and find a solution to it. -In learning about ratio, five broad ratio categories are discussed here: a. Liquidity Ratios-to know how liquid is the firm-to measure the adequacy of a firms is cash resources to meet short term obligation on time. b. Activity Ratios-to evaluate the firms efficiency in utilizing the firms assets/resources. c. Solvency Ratios-to know how the firm finances its assets-to examine the firms capital structure and the ability of the firm to pay its debt. d. Profitably Ratios-to measure the efficiency of the firms activities in generating profits. e. Ownership Ratios-to assist the stockholders in evaluating the firms activities and policies that affect the market prices of the common stock. Liquidity Ratios -Two ratios are commonly used to measure liquidity of the firm:a. Current Ratio = Current Asset CR Current Liabilities- Low ratio will indicate that firms are not able to pay its bill on time.- A high ratio may indicate an excessive amount of current asset meaning,managements failure to utilize the current assets efficiently.- As general rule, 2/1 ratio is considered acceptable. b. Quick Ratio = Current Assets-InventoriesQRCurrent Liabilities
2. -inventories are excluded from current assets because inventories are the least liquid assets because inventories take longer time to be converted into cash. -as general rule 1/1ratio is considered reasonablec. Cash Ratio = Cash + Marketable SecuritiesCR Current Liabilities-the use of current and quick ratios implicitly assumes that all the current assets will be converted to cash. -in reality, firms do not liquid their current assets to pay their current liabilities. -minimum levels of inventories and receivables are always needed to keep the operation going if not the firms are seemed to cease operation. -therefore, cash ratio helps to measure the actual cash resources of a firm. Activity Ratios -these ratios measure how efficient the firm is managing its resources. -it is also known as turnover ratios because it involve with sales and all assets of the firma. Receivables Ratio -these ratios indicate mode of selling and effectiveness of collection: Accounts receivable turnover = Sales (ARTO)Account Receivable Average collection period= 365 acpar turnover-accounts receivable turnover has to be compared to the firms sales with its uncollected bills from the customers as a result of credit sales. -high ratio indicates that the firm has more cash sales than credit sales and low ratio may indicate that the firm has more credit sales and or an increased in uncollected bills. -average collection period determines how many days on average the firm can collect its bill from customers. -more days than the agreed credit period could indicate slow collection and vice versa. b. Inventory Turnover Ratios -These ratios indicate the effectiveness of inventory management. Inventory Turnover = Cost of Goods Sold (ITO) Inventory -inventory turnover determines how many times the inventory could be turned into finished goods. -high ratios indicate the effectiveness of management in managing its inventory and vice versa.c. Assets Turnover Ratio -it measures the effectiveness of management in utilizing all the firms assets which indicates the amount sales generated for every dollar invested into assets. 3. Total Assets Turnover = Sales (TATO) Total Assets-Eg if the answer is 0.25 times, meaning that the firm is able to generate rm0.25 of sales for every rm1 invested in total assets -whether good or not, its depend on past years or its competitor total assets turnover. Solvency Ratios -these ratios determine the relationship between debt and equity components of the firms assets. -that is, it indicate how much of the firms assets are financed by debt and equity and as indication for future prospects financing and financial risk of the firm. -if the ratios are too high, the firm has difficulty in additional debt financing. -as general, the debt should not exceed 50% of the total sources fund.Debt Ratio = Total Debt (DR)Total Assets Debt Equity Ratio = Total Debt (DTE) Total equity Time Interest Earned = Operating Income (TIE) Interest -in term of an obligation, times interest earned provides an indication of the firms ability in servicing its interest payment to its lenders. -high ratio means that the firms paying ability is good and vice versa. Profitability Ratios -profitability is the ability of a firm to generate earning or income from the used of assets, sales or investments. -this ratio is important to: 1. Stockholders for receiving dividends increase in market price that leads to capitalgain. 2. Creditors as a measure of ability and capacity of debt coverage. 3. Management as a measure of performance for the firmGross Profit Margin = Gross Profit (GPM) Sales Operating Profit Margin = EBIT (OPM) Net Profit Margin = Net Income (NPM) Sales -high profit margin will indicate that the firm is reducing its costs or increasing its selling price or increasing its sales or vice versa.Return on Total Assets = Net Income (ROTA) Total Asset -the ratio will indicate that the return generated for every dollar invested in total assets. 4. Return on Total Equity = Net Income Total Equity -it measures the return to both common and prefered stockholders on every dollar that they invested in the firmOwnership Ratios -the ratio will help the shareholders to analyze the present and future investment in a firm. Earning Per Share = Net Income (EPS) No of common Shares outstanding Price Earning Ratio = Market Price Per Share(P/E Ratio)EPS-EPS is the ratio refers to an earning that might be available in a form of dividend to the common shareholders or the growth in the firms earnings. -P/E ratio is the ratio that measure used by the investors in making stock purchases. -If the stock has low P/E multiple then the stock is under valued and high P/E multiple it is considered as overvalued.Dividend Per Share = Dividend Payment (DPS) Number of SalesDividend Payout Ratios = Dividend Per Share(DPR) Earnings Per ShareDividend Yield = Dividend Per Share DYMarket Price Per Share -DPS is the total dividend payment per share which indicates an amount of cash to be received by a shareholder for every share held. -DPR is the percentage of the firms earnings being allocated to dividend payment. DY is the current return to investor as a percentage of his or her investment. Book Value Per Share (BVPS) -this ratio is equal to stockholders equity divided by number of shares outstanding. BVPS= Equity StockholderNumber of shares outstanding -the book value is a benchmark for the price of the common stock. If the market price is below the book value, then the stock is undervalued stock. Dividend Ratios -these ratios are concerned about payment or cash dividends. -As such, low dividend declared, means unattractive to investors and high dividend payment will result inadequate funds to finance future growth. 5. 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