Interested parties  Shareholders - to measure management’s performance  Investors - to make their investment decisions  Management - to plan and control operation Ratio analysis is a quick and easy way of analyzing a firm’s financial statements.

 Ratio analysis cannot accurately pinpoint the problems of the firm. It is reasonable to expect that it points to a direction for a more detailed analysis.  Financial ratio itself is not meaningful without comparing it to a benchmark. Benchmarks can be a rival firm’s financial ratio or an industry average.  Sometimes a firm’s problems can be disguised as so-called “good ratios.” For example, a high inventory turnover can be an indicator of the firm’s dangerously low level of inventory.

 Liquidity Ratios  Efficiency Ratios  Leverage Ratios  Profitability Ratios Liquidity and leverage ratios primarily measure risk; efficiency and profitability ratios measure performance and return.

 Net working capital = Current assets - Current liability  Current ratio  Quick (acid-test) ratio

 Inventory turnover  Average collection period (Days sales outstanding)  Assets Turnover  Fixed assets turnover

 Debt ratio  Debt-to-Equity ratio  Times interest earned ratio

 Gross profit margin  Operating profit margin

 Net profit margin  Return on total assets (ROA)  Return on equity (ROE)

Used by financial managers as a structure to dissect the firm's financial statements and to assess its financial condition. ROA = = (net profit margin) x (assets turnover) ROE = = (net profit margin) x (assets turnover) x (equity multiplier)

 Calculate the following ratios: a. Current ratio b. Days sales outstanding c. Inventory turnover

d. Total assets turnover e. Profit margin on sales

f. Return on Assets OR

g. Return on Equity OR

h. Debt ratio