Financial Ratios BUS 499 CAPSTONE L. Panetta P. Tinsley © Idaho State University – College of Business.

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Presentation transcript:

Financial Ratios BUS 499 CAPSTONE L. Panetta P. Tinsley © Idaho State University – College of Business

Financial Ratios represent an attempt to standardize financial information in order to facilitate meaningful comparisons over time (time series) and between firms or firm to industry (cross section). The business is a storehouse of resources (i.e. assets on the balance sheet) which it converts to profit through production and then sales (reported on the income statement). What are Financial Ratios? How do Ratios Relate to Business Activity?

What are the Four Types of Financial Ratios? Leverage Ratios Profitability Ratios Liquidity Ratios Efficiency Ratios

What Do Liquidity Ratios Measure? Measure the ability of a firm to meet its short term financial obligations. What are the Liquidity Ratios? Current Ratio Acid Test Ratio

What Do Efficiency Ratios Measure? Measure how effectively the firm is using it’s resources to generate sales. Average Collection Period Inventory Turnover

What Do Leverage Ratios Measure? Measure the extent to which non-owner supplied funds have been used to finance the firm’s assets. Debt Ratio

Profitability Ratios Measure the firm’s profitability at different levels. Gross Profit Margin Operating Profit Margin Net Profit Margin Return On Total Assets

What is the Current Ratio? Current Assets/Current Liabilities 76/52= /75=1.59 Better

What is the Acid Test Ratio? Current Assets-Inventory/Current Liabilities (76-40)/52=.69 (119-55)/75=.85 Better

What is Inventory Turnover? Cost of Goods Sold/Inventory 245/40= /55=6.33 Better

What is the Debt Ratio? Debt/Total Assets (52+45)/191=50.79% (75+40)/244=47.31% Better

What is Gross Profit Margin? Gross Profit/Sales 105/350=30.00% 157/505=31.09% Better

What is Operating Profit Margin? Net Operating Income/Sales 48/350=13.71% 76/505=15.05% Better

What is the Net Profit Margin? Net Income/Sales 27/350=7.71% 46/505=9.11% Better

What is Return on Total Assets? Net Income/Total Assets 27/191=14.14%46/244=18.85% Better

What is Return on Common Equity? Net Income/Common Equity 27/(85+9)=28.72%46/(85+44)=35.66% Better

END