1. PERFORMANCE & PROFITABILITY MEASURES

2. Uses of Financial Numbers Firms provide goods and services using assets that funded Debt Equity Mix of Debt and Equity = Capital Structure Debt/Equity Ratio Debt/(Debt + Equity) = Financial Leverage Leverage magnifies performance How efficiently is management using the assets? How profitable is the firm?

3. Short-Term Solvency Short-Term Solvency and Liquidity Measures Current Ratio = Current Assets/Current Liabilities Quick Ratio = (Current Assets – Inventory)/Current Liabilities Cash Ratio = Cash / Current Liabilities Net Working Capital = Current Assets – Current Liabilities Net Working Capital/Total Assets Average Daily Operating Cost = (Total Cost for Year excluding Depreciation and Interest)/365 Suppose there is a strike and cash inflows dry up, how many days can the company operate? Interval Measure = Current Assets/Average Daily Operating Cost

4. Long-Term Solvency Total Debt Ratio (Total Assets – Total Equity)/Total Assets = Debt/(Debt + Equity) Long-term Debt is of greater importance since short term debt constantly changes and accounts payable reflection of business Long-Term Debt Ratio = Long-Term Debt / (Long-Term Debt + Equity) Times Interest Earned Ratio = EBIT/Interest Cash Coverage Ratio = (EBIT + Depreciation)/Interest Depreciation does not impact cash

5. Efficiency Measures Inventory Turnover = Cost of goods sold/Inventory Day’s sales in inventory = 365/Inventory Turnover Receivable Turnover = Sales/Accounts Receivables Day’s sales in receivables = 365/Receivable Turnover Net Working Capital Turnover= Sales/NWC Fixed Assets Turnover= Sales/Fixed Assets Total Assets Turnover= Sales/Total Assets

6. Profitability Measures = Sales/NWC = Sales/Fixed Assets Total Assets Turnover= Sales/Total Assets Profit Margin = Net Income/Sales Return on Assets (ROA)= Net Income/Total Assets Return on Equity (ROE) = Net Income/ Total Equity ROE = ROA * (1+ Debt/Equity) EPS = Net Income / No of Shares Outstaning PE = Price per Share/Earning Per Share

7. DU PONT IDENTITY ROE = Net Income/Equity = (Net Income/Assets) *(Assets/Equity) ==(Net Income/Sale)*(Sales/Assets)*(Assets/Equity) =(Net Income/Sale)*(Sales/Inventory)* (Inventory/Asset)*(Assets/Equity)