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Pre – MBA Program Accounting Ratios Nov 11, 2012
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Parts of a Financial Statement
Statement of Income Balance Sheet Statement of Cash Flow Statement of Stockholders’ Equity
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Basic Accounting Identity
Assets = Liabilities + Shareholder’s Equity A = L + Sh Eq
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4 Basic Types of Analysis
Operating or activity analysis Liquidity analysis Long Term and solvency analysis Profitability analysis
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Operating or activity analysis
Inventory a) Turnover b) Days’ sales in Inventory Cost of goods sold Inventory 365 days Inventory Turnover Sales Accounts Receivable 2. Receivables a) Turnover b) Collection Period Payables a) Turnover b) Payables Period Cash Conversion Cycle = Inventory period + Collection Period - Payables Period Assets Turnover 365 days Receivables Turnover Cost of goods sold Payables 365 days Payables Turnover Sales Assets
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Net Working Capital to Assets Interval measure
Liquidity Ratios Current ratio Quick Ratio Cash Ratio Net Working Capital to Assets Interval measure Current Assets Current Liabilities Current Assets - Inventory Current Liabilities Cash Current Liabilities Net working Capital Total assets Current Assets Average Daily Operating Costs
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Earnings before Interest and Taxes (EBIT)
Long term and solvency analysis Liabilities Total Assets Total Debt Ratios a) Total Debt b) Debt/ Equity c) Equity Multiplier Liabilities Total Equity Total Assets Total Equity Earnings before Interest and Taxes (EBIT) Interest Times Interest Earned Cash Coverage EBIT + Depreciation Interest
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Profitability Measures
Profit Margin Return on Assets Return on Equity (ROE) 4. Dupont Identity Net Income Sales Net Income Assets Net Income Equity EBIT X EBI X Net Income X Sales X Assets = EBIT EBI Net Income Sales Assets Equity Equity Tax Interest Net Margin Asset Leverage Return Burden Burden Turnover on Assets
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Working capital – ST Assets – ST Liabilities
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Operating or activity analysis
872 1.93 Inventory a) Turnover b) Days’ sales in Inventory 365 days or 1.93 189 days 2,289 or 345 2. Receivables a) Turnover b) Collection Period Payables Turnover Assets Turnover 6.63 55 days 365 days or 6.63 1,679 or 422 3.97 2, or 5,589 2.44
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Net Working Capital to Assets Interval measure
Liquidity Ratios 1,282 672 Current ratio Quick Ratio Cash Ratio Net Working Capital to Assets Interval measure 1.91 445 672 .67 100 672 .14 610 5,589 .11 1,282 6.09 210
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Earnings before Interest and Taxes (EBIT)
Long term and solvency analysis 2,855 5,589 .51 Total Debt Ratios a) Total Debt b) Debt/ Equity c) Equity Multiplier 1.04 2,855 2,734 5,589 2,734 2.04 Earnings before Interest and Taxes (EBIT) Interest Times Interest Earned Cash Coverage EBIT + Depreciation Interest
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Profitability Measures
Profit Margin Return on Assets Return on Equity (ROE) 4. Dupont Identity 63 2,289 .03 63 5589 .01 63 2734 .02 EBIT X EBI X Net Income X Sales X Assets = EBIT EBI Net Income Sales Assets Equity Equity Tax Interest Net Margin Asset Leverage Return Burden Burden Turnover on Assets
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