management 3

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management 3
2012-10-13 22:19:35
ratio analysis

ratio analysis
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  1. ratio analysis
    process of using the balance sheet and income statement to detect trends in the company and problems 
  2. types of ratios
    • profitability ratios
    • overall performance ratios
    • liquidity ratios
    • leverage or sovency ratios
    • activity or efficency ratios
  3. profitability ratios
    measures the ability of the business to earn a profit 

    compare to similar companies 
  4. Profitability ratio

    gross margin= net sales- COGS / sales
    indicates how much proft is earned on your products without considering expenses

    how much profit is earned at gross profit level 
  5. profitability ratio

    net profit margin= net income/ sales
    neasure of the % of each sale dollar that remains as profit after all expenses have been paid 

    how much profit comes form every dollar of sale 
  6. overall prerformance ratios
    funds available to the company (debts and equity), are they being used wisely?
  7. overall prerformance ratios

    return on equity = net profit/ owners equity
    measures the return the firm earned on its owners investment in the firm 
  8. overall prerformance ratios

    return on assets= net income/ total assets
    indicates the firms effectiveness in generating profits from its available assets
  9. liquidity ratios
    measures a companys ability to pay its short term debts as they come due
  10. liquidity ratios

    current ratio= current asset/current liabilities
    measurer the number of times the firm can cover its current liabilities with its current assets 
  11. liquidity ratios

    quick ratio= current assets - inventory/ current liabilities
    measurer the firms ability to meet its current obligations with the most liquid of its current assets 
  12. leverage or solvency ratios 
    can a company pay its long term debts as they are due? 
  13. leverage or solvency ratios 

    debut ratio= total debts/total assets
    measures the proportion of a firms total assets that is acquired with borrowed funds
  14. leverage or solvency ratios 

    times-interest earned = operating expenses/ interest expenses
    calculates the companys ability to meet interest requirements

    want a higher number!
  15. activity or efficiency ratios
    measures the speed with which various accounts are converted into sales or cash
  16. activity or efficiency ratios

    inventory turnover= COGS/ inventory
    measures the liquidity of the firms inventory 

    how quick goods are sold and replenished
  17. activity or efficiency ratios

    accounts receivable turnover= total revenue or sales/ accounts receivable
    measures how many times accounts receivable were collected during the year 

    lower number= collect money slow and more money out with customer credit 
  18. types of ratio analysis
    company history (interanlly)

    compare to competitors

    compare to industry average (your size)
  19. ratio analysis uses
    internally: managers to see where can improve

    • externally: potential stakeholders
    • current stake holders
    • banks (loans)