Ross_Ch3 TH
Ross_Ch3 TH
Ross_Ch3 TH
Chapter Outline
Example (cont.)
Liquidity Ratios
• Current Ratio = CA/CL
= $1,801,690/$1,780,785 = 1.01
• Quick Ratio = (CA – Inventory)/CL
= ($1,801,690 – $388,947)/$1,780,785
= 0.793
• Cash Ratio = Cash/CL
= $3,171/$1,780,785 = 0.002
− Cash means cash + cash equivalents
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3-12
3-13
Example (cont.)
Long-term Solvency Ratios
• Total Debt Ratio = (TA – TE)/TA
= ($4,931,444 – $1,761,044)/$4,931,444
= 0.6429
− The firm finances a little over 64% of its assets with
debt.
• Debt/Equity = TD/TE
= ($4,931,444 – $1,761,044)/$1, 761,044
= 1.80
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3-13
3-14
Example (cont.)
Long-term Solvency Ratios
• Debt/Equity = TD/TE
= ($4,931,444 – $1,761,044)/$1,761,044
= 1.80
• Equity Multiplier = TA/TE = 1 + D/E
= 1 + 1.800 = 2.800
Example (cont.)
Asset Management
• Inventory Turnover = Cost of Goods Sold/Inventory
= $1,762,721/$388,947
= 4.53
• Days’ Sales in Inventory = 365/Inventory Turnover
= 365/4.53
= 81 days
Example (cont.)
Asset Management
• Receivables Turnover = Sales/Accounts Receivable
= $4,335,491/$1,095,118
= 3.96
• Days’ Sales in Receivables = 365/Receivables Turno.
= 365/3.96
= 92 days
Example (cont.)
Asset Management
• NWC Turnover = Sales/NWC
= $4,335,491/($1,801,690 – $1,780,785)
= 207.390
• Fixed Asset Turnover = Sales/Net Fixed Assets
= $4,335,491/$3,129,754
= 1.385
Example (cont.)
Asset Management
• Total Asset Turnover = Sales/Total Assets
= $4,335,491/$4,931,444
= 0.88
− Measure of asset use efficiency
− Not unusual for TAT < 1, especially if a firm has a
large amount of fixed assets
Example (cont.)
Profitability ratios
• Profit Margin = Net Income/Sales
= $471,916/$4,335,491 = 0.1088
• Return on Assets (ROA) = Net Income/Total Assets
= $471,916/$4,931,444
= 0.0957
• Return on Equity (ROE) = Net Income/Total Equity
= $471,916/$1,761,044
= 0.2680
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3-20
3-21
Example (cont.)
Market value ratios
• PE Ratio = Price per share/Earnings per share
= $60.98/$2.29
= 26.6
Where Earnings per share = Net Income/Shares
Outstanding
Example (cont.)
Market value ratios
• Market-to-book ratio = Market Value Per Share/
Book Value Per Share
= 7.1
• Enterprise Value (EV)/EBITDA = 11.85
Where Enterprise Value = Market Value of Equity
+ Market Value of Interest-bearing Debt
– Cash (and Cash Equivalent)
Sales
NWC turnover
NWC
Sales
Fixed asset turnover
Net fixed assets
Sales
Total asset turnover
Total assets
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3-25
• ROE = NI/TE
• Multiply by 1 and then rearrange
NI TA NI TA
ROE = × = × = ROA × EM
TE TA TA TE
Quick Quiz