8 Unilate Textiles: Statement of Cash Flows Continued
9 Unilate Textiles: Statement of Cash Flows Continued
10 Ratio AnalysisAnalysis of a firm’s ratios is generally the first step in financial analysis.Ratios are designed to show relationships between financial statement accounts within firms and between firms.
11 What is the Purpose of Ratio Analysis? Give idea of how well the company is doingStandardize numbers; facilitate comparisonsUsed to highlight weaknesses and strengths
12 What Are the Five Major Categories of Ratios What Are the Five Major Categories of Ratios? What Questions Do They Answer?Liquidity: Can we make required payments in the current period?Asset mgt.: Right amount of assets vs. sales?Debt mgt.: Right mix of debt and equity?Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA?Market values: Do investors like what they see as reflected in P/E and M/B ratios?
14 What is Unilate’s Current Ratio? Current AssetsCurrent Liabilities$465.0$130.0=3.6 timesIndustry average =4.1 times
15 What is Unilate’s Quick, or Acid Test, Ratio? $ $270.0$130.0Quick Ratio =Current Assets- InventoriesCurrent Liabilities== 1.5 times$195.0Industry average =2.1 times
16 Unilate’s Liquidity Position Ratios is slightly below industry average.Inventories are the least liquid of Unilate’s assets and they are the assets that suffer losses in the event of a forced sale.The quick ratio shows that, if receivables are collected in full, Unilate can payoff its current liabilities without having to liquidate its inventory.
17 What is Unilate’s Inventory Turnover Ratio? =$1,230.0$270.04.66.timesIndustry average =7.4 times
18 Comments on Unilate’s Inventory Turnover Compares poorly with industryMay be holding excess inventoriesMay be holding old/obsolete inventory.
19 What is Unilate’s Days Sales Outstanding Ratio? Industry average =32.1 days
20 What is Unilate’s Fixed Assets Turnover Ratio? =$1,500.0$380.03.9 times=4.0 timesIndustry Average
21 What is Unilate’s Total Assets Turnover Ratios? =$1,500.0$845.01.8 times=2.1 timesIndustry Average
22 Unilate’s Fixed Assets Turnover and Total Assets Turnover Total asset turnover is below industry average.Unilate might have excess inventories and receivables.
23 Calculate the Debt Ratio Debt Ratio = Total debtTotal assets=+$130.0.$300.0$845.045.0%$430.00.509 = 50.9%Industry Average
24 Calculate the Times-Interest-Earned Ratio TIE = EBITInterest charges3.3 times$40.0$130.0=Industry Average =6.5 times
25 Calculate the Fixed Charge Coverage Ratio Industry Average = 5.8xAll three previous ratios reflect use of debt, but focus on different aspects.
26 Unilate’s Profitability Ratios-- Profit Margin, ROA, and ROE $54.0$1,5000.036 = 3.6%=4.7%Industry Average =
27 Unilate’s ROA, and ROE $54.0 $845.0 = 0.064 = 6.4% = 12.6% = = 6.4%=12.6%Industry Average =$54.0$415.0- 0 = = 13.0%=17.2%Industry Average =
28 Unilate’s Market Value Ratios Price/Earnings Ratio 10.6 times$2.16$23.00=13.0 timesIndustry Average =
29 Unilate’s Market Value Ratios Market/Book Ratio =$23.00$16.001.4 times2.0 timesIndustry Average =
30 Rate of Return on Common Equity 181716151413121110IndustryUnilate
31 Summary of Ratio Analysis: The DuPont Equation ROA = Net Profit Margin X Total Assets TurnoverNet IncomeSalesTotal AssetsX=$54.0$1,500.0$845.0= % X = 6.4%
32 DuPont Equation Provides Overview Firm’s profitability (measured by ROA)Firm’s expense control (measured by profit margin)Firm’s asset utilization (measured by total asset turnover)
33 What are Some Potential Problems and Limitations of Financial Ratio Analysis? Comparison with industry averages is difficult if the firm operates many different divisions.“Average” performance not necessarily good.Inflation distorts balance sheets.
34 What are Some Potential Problems and Limitations of Financial Ratio Analysis? Seasonal factors can distort ratios.“Window dressing” techniques can make statements and ratios look better.Different operating and accounting practices distort comparisons.
35 What are Some Potential Problems and Limitations of Financial Ratio Analysis? Sometimes hard to tell if a ratio is “good” or “bad”Difficult to tell whether company is, on balance, in strong or weak position