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Comparisons Within The Financial Statements

The document discusses different types of financial ratios used to analyze a company's financial statements, including: 1) Profitability ratios that relate financial returns to equity holders and creditors. 2) Leverage ratios that measure a company's use of debt. 3) Solvency ratios that assess a company's ability to meet its debt obligations. 4) Asset turnover ratios that measure how efficiently a company uses its assets to generate sales. 5) Other ratios like earnings per share, price to earnings, dividend yield, and stock price return.

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Akhil Jain
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46 views6 pages

Comparisons Within The Financial Statements

The document discusses different types of financial ratios used to analyze a company's financial statements, including: 1) Profitability ratios that relate financial returns to equity holders and creditors. 2) Leverage ratios that measure a company's use of debt. 3) Solvency ratios that assess a company's ability to meet its debt obligations. 4) Asset turnover ratios that measure how efficiently a company uses its assets to generate sales. 5) Other ratios like earnings per share, price to earnings, dividend yield, and stock price return.

Uploaded by

Akhil Jain
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Comparisons within the Financial Statements

Financial Ratios

• Profitability ratios

• Leverage ratios

• Solvency ratios

• Asset turnover ratios

• Other ratios
Financial Ratio Analysis

Profitability ratios
These ratios relate financial returns to stockholders (net income) and creditors
(interest payments) to a variety of account numbers.

Profitability Ratios

• Return on Equity (ROE)

Net income / Average Stockholders’ Equity

• Return on Assets (ROA)

{Net Income + [Interest Expense·(1-Tax Rate)]} / Average Total Assets

• Return on Sales (Profit Margin)

{Net Income + [Interest Expense·(1-Tax Rate)]} / Net Sales


Financial Ratio Analysis
Leverage ratios
Leverage refers to using borrowed funds to generate returns for stockholders.
E.g. borrowing at 8% and creating returns of 12% is using leverage effectively.
Leverage creates additional returns, but also commits the firm to future cash obligations.

Leverage Ratios

• Common Equity Leverage

Net income / {Net Income + [Interest Expense·(1-Tax Rate)]}

• Capital Structure Leverage

Average Total Assets / Average Stockholders’ Equity

• Debt / Equity Ratio

Average Total Liabilities / Average Stockholders’ Equity

• Long-Term Debt Ratio

Long-term Liabilities / Total Assets


Financial Ratio Analysis
Solvency ratios
Solvency ratios measure a firms ability to meet its debt payments as the come due.

Solvency Ratios

• Current Ratio

Current Liabilities / Current Assets

• Quick Ratio

(Cash + Marketable Securities + Net Accounts Reveivable) / Current Liabilities

• Interest Coverage

(Net Income + Tax Expense + Interest Expense) / Interest Expense

• Accounts Payable Turnover

Cost of Goods Sold / Average Accounts Payable


Financial Ratio Analysis

Asset turnover ratios


These ratios measure the speed with which assets move through operations, i.e. the number
of times that assets are acquired, used and replaced.

Asset Turnover Ratios

• Receivables Turnover

Net Credit Sales / Average Accounts Receivable

• Inventory Turnover

Cost of Goods Sold / Average Inventory

• Fixed Assets Turnover

Sales / Average Fixed Assets

• Total Asset Turnover

Sales / Average Total Assets


Financial Ratio Analysis

Other Ratios

• Earnings per Share

Net Income / Average Number of Common Shares Outstanding

• Price / Earnings (P/E) Ratio

Market Price per Share / Earnings per Share

• Dividend Yield Ratio

Dividends per Share / Market Price per Share

• Stock Price Return

{Market Price (1) – Market Price (0) + Dividends} / Market Price (0)

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