1. 3-0 Ratio Analysis 3.3 Ratios also allow for better comparison through time or between companies As we look at each ratio, ask yourself what the ratio is trying to measure and why is that information important Ratios are used both internally and externally LO3 © 2013 McGraw-Hill Ryerson Limited

2. 3-1 Categories of Financial Ratios Short-term solvency or liquidity ratios Long-term solvency or financial leverage ratios Asset management or turnover ratios Profitability ratios Market value ratios LO3 © 2013 McGraw-Hill Ryerson Limited

3. 3-2 Computing Liquidity Ratios Current Ratio = CA / CL 1,801,690 / 1,780,785 = 1.01 times Quick Ratio = (CA – Inventory) / CL (1,801,690 – 388,947) / 1,780,785 =.793 times Cash Ratio = Cash / CL 3,171 / 1,780,785 =.002 times Cash means cash + cash equivalents LO3 © 2013 McGraw-Hill Ryerson Limited

4. 3-3 Computing Long-term Solvency Ratios Total Debt Ratio = (TA – TE) / TA (4,931,444 – 1,761,044) / 4,931,444 =.6429 times or 64.29% The firm finances a little over 64% of its assets with debt. LO3 © 2013 McGraw-Hill Ryerson Limited

5. 3-4 Long-Term Solvency Ratios continued Debt/Equity = TD / TE (4,931,444 – 1,761,044) / 1, 761,044 = 1.800 times Equity Multiplier = TA / TE = 1 + D/E 1 + 1.800 = 2.800 LO3 © 2013 McGraw-Hill Ryerson Limited

6. 3-5 Computing Coverage Ratios Times Interest Earned = EBIT / Interest 820,183 / 52,841 = 15.5 times Cash Coverage = (EBIT + Depreciation) / Interest (820,183 + 362,325) / 52,841 = 22.38 times LO3 © 2013 McGraw-Hill Ryerson Limited

7. 3-6 Computing Inventory Ratios Inventory Turnover = Cost of Goods Sold / Inventory 1,762,721 / 388,947 = 4.53 times Days’ Sales in Inventory = 365 / Inventory Turnover 365 / 4.53 = 81 days LO3 © 2013 McGraw-Hill Ryerson Limited

8. 3-7 Computing Receivables Ratios Receivables Turnover = Sales / Accounts Receivable 4,335,491 / 1,095,118 = 3.96 times Days’ Sales in Receivables = 365 / Receivables Turnover 365 / 3.96 = 92 days LO3 © 2013 McGraw-Hill Ryerson Limited

9. 3-8 Computing Total Asset Turnover NWC Turnover = Sales / NWC 4,335,491 / (1,801,690 - 1,780,785) = 207.390 times Fixed Asset Turnover = Sales / Net Fixed Assets 4,335,491 / 3,129,754 = 1.385 times LO3 © 2013 McGraw-Hill Ryerson Limited

10. 3-9 Asset Turnover Ratios continued Total Asset Turnover = Sales / Total Assets 4,335,491 / 4,931,444 =.88 times Measure of asset use efficiency Not unusual for TAT < 1, especially if a firm has a large amount of fixed assets LO3 © 2013 McGraw-Hill Ryerson Limited

11. 3-10 Computing Profitability Measures Profit Margin = Net Income / Sales 471,916 / 4,335,491 =.1088 times or 10.88% Return on Assets (ROA) = Net Income / Total Assets 471,916 / 4,931,444 =.0957 times or 9.57% Return on Equity (ROE) = Net Income / Total Equity 471,916 / 1,761,044 =.2680 times or 26.8% LO3 © 2013 McGraw-Hill Ryerson Limited

12. 3-11 Computing Market Value Measures Market Price of Stock = $60.98 per share Shares outstanding = 205,838,910 Market Value of LTD = $1,461,874,980 EPS = Net Income / Shares Outstanding 471,916,000 / 205,838,910 = 2.29 LO3 © 2013 McGraw-Hill Ryerson Limited

13. 3-12 Market Value Measures Continued PE Ratio = Price per share / Earnings per share 60.98 / 2.29 = 26.6 times PEG Ratio = PE ratio / expected earnings growth rate © 2013 McGraw-Hill Ryerson Limited LO3

14. 3-13 Market Value Ratios continued Market-to-book ratio = Market Value Per Share / Book Value Per Share 60.98 / (1,761,044,000 / 205,838,910) = 7.1 times Enterprise Value (EV) / EBITDA = (Market Value of Equity + Market Value of Debt + Preferred Shares + Minority Interest – Cash & Equivalents) / EBITDA (60.98 x 205,838,910 + 1,461,874,980 – 3,171,000) / (820,183,000 + 362,325,000) = 11.85 times LO3 © 2013 McGraw-Hill Ryerson Limited

15. 3-14 Table 3.8 – Common Financial Ratios LO3 © 2013 McGraw-Hill Ryerson Limited

16. 3-15 Table 3.8 – Common Financial Ratios LO3 © 2013 McGraw-Hill Ryerson Limited