2. LAP: QS-043

3. Objectives Explain how financial ratios are used. Demonstrate how to interpret profitability ratios.

4. Explain how financial ratios are used. Objective

5. ToolsTools  Assess performance  Make comparisons Calculated by dividing one number into anotherCalculated by dividing one number into another Give meaningful information about various aspects of our livesGive meaningful information about various aspects of our lives Using Ratios

6. ProfitabilityProfitability EfficiencyEfficiency Level of debtLevel of debt And moreAnd more Ratios in Financial Analysis

7. Many Different Types

8. Demonstrate how to interpret profitability ratios. Objective

9. Sales Growth = Year Two total revenue – Year One total revenue Year One total revenue Year One total revenue Sales Growth Are sales increasing or decreasing?

10. Year One sales = $4,075,522 Year Two sales = $5,294,247 Sales Growth Example 5,294,247 - 4,075,522 =.299 or 29.9% 4,075,522 4,075,522 What does this mean? Sales in Year Two are 30% higher than they were in Year One. (From income statement)

11. What are profits on a per share basis? Earnings per Share (EPS) EPS = net earnings outstanding shares outstanding shares

12. 2004 net earnings = $390,559 2004 net earnings = $390,559 2004 basic shares outstanding = 397,173 2004 basic shares outstanding = 397,173 EPS Example $390,559 =.98 or 98¢ per share 397,173 397,173 What does this mean? For this time period, the company earned 98¢ for each share of stock. 1 Share Corporate office 98¢ (From income statement)

13. How much of a company’s sales is profit? What does this mean? For this time period, this company kept as net profit 8.8¢ for every dollar of sales. Profit Margin

14. ROE = Net income Shareholders’ equity Shareholders’ equity Return on Equity (ROE) How well are stockholders’ investments being used?

15. What does this mean? For this time period, the company earned a 15.8% return on shareholders’ equity. ROE Example Net income = $390,559 Shareholders’ equity = $2,474,218 $390,559 =.158 or 15.8% $390,559 =.158 or 15.8%$2,474,218 (From income statement) (From balance sheet)

16. How much are investors willing to pay for earnings? Price-earnings (PE) PE = Stock price per share Earnings per share Earnings per share

17. For this time period and compared to the average market PE of 15, investors have high expectations for this company’s performance. PE Example PE = 23.52 = 24.98.98

18. PEG = PE = Stock price per share / earnings per share EPS growth Change in EPS / Beginning EPS Price-earnings and Growth (PEG) How well are investor expectations reflected in growth? Stock

19. What does this mean? For this time period, the stock is priced lower than indicated by the company’s growth. It may be undervalued. PEG Example PEG = 24 =.54 44 44

20. Quick Case What do financial managers hope to gain?What do financial managers hope to gain? Why doesn’t it usually work?Why doesn’t it usually work? How does it affect financial analysis ratios?How does it affect financial analysis ratios? How to Win Investors by Inflating Sales Channel Stuffing: An illegal method of inflating sales and earnings by sending distributors more product than they actually need

21. MarkED Acknowledgments Original Developers Christopher C. Burke, Jane Wright, MarkED Version 1.0 Copyright © 2007 MarkED Resource Center

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