1. ©2012 McGraw-Hill Ryerson Limited 1 of 34 Learning Objectives 1.Calculate 13 financial ratios that measure profitability, asset utilization, liquidity and debt utilization. (LO1) 2.Assess a company’s source of profitability using the DuPont system of analysis. (LO2) 3.Examine the ratios in comparison to industry averages. (LO3) 4.Examine the ratios and company performance by means of trend analysis. (LO4)

2. ©2012 McGraw-Hill Ryerson Limited 2 of 34 Which ratio(s) is/are most important? It depends on your perspective Suppliers and banks (short-term creditors) are most interested in liquidity ratios Shareholders are most interested in profitability ratios Long-term creditors concentrate on debt utilization ratios The effective utilization of assets is management’s responsibility LO2

3. ©2012 McGraw-Hill Ryerson Limited 3 of 34 Saxton Company Industry Average 3-3. Return on equity (ROE) = a. = 20% 15% b. Equity multiplier = = 1.6 = 1.5 c. ROA × Equity multiplier = 0.125 × 1.60 = 20% 0.10 × 1.50 = 15% Total assets Equity $1,600,000 $1,000,000 Net income Shareholders’ equity $200,000 $1,000,000 Profitability ratios(b) 1 0.6667 LO1 and LO2

4. ©2012 McGraw-Hill Ryerson Limited 4 of 34 DuPont Analysis Reveals the relationships between profitability ratios and asset utilization ratios and debt utilization ratios Decomposes a firm’s profitability into several determining factors ROA = Net Income Assets = Net Income x Assets Sales Profit Margin Asset Turnover LO2

5. ©2012 McGraw-Hill Ryerson Limited 5 of 34 DuPont Analysis ROE = Net Income Equity = Net IncomeSalesAssets EquitySalesAssets x x Profit Margin Asset Turnover Equity Multiplier LO2

6. ©2012 McGraw-Hill Ryerson Limited 6 of 34    Figure 3-1 DuPont analysis Net income Sales Total assets Profit margin Asset turnover Total assets Equity Return on assets Financing plan (Equity multiplier) Return on Equity =  LO2 

7. ©2012 McGraw-Hill Ryerson Limited 7 of 34 Profit Asset Return on Equity Return Company Margin X Turnover = Assets X Multiplier = on Equity CP Rail 22.06% 0.346 7.63%2.67 20.37% CN Rail 25.17 0.2926 7.362.24 16.49 Loblaw 1.77 2.20 3.892.40 9.34 Cdn Tire 3.34 0.99 3.312.35 7.78 LO2 Finance in Action Applying DuPont Analysis on the Rails

8. ©2012 McGraw-Hill Ryerson Limited 8 of 34 Techniques of Ratio Analysis 1.DuPont Analysis 2.Comparative Analysis 3.Trend Analysis 4.Common-Size Statements LO1/LO2/LO3/LO4