management 3
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ratio analysis
process of using the balance sheet and income statement to detect trends in the company and problems

types of ratios
 profitability ratios
 overall performance ratios
 liquidity ratios
 leverage or sovency ratios
 activity or efficency ratios

profitability ratios
measures the ability of the business to earn a profit
compare to similar companies

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

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

overall prerformance ratios
funds available to the company (debts and equity), are they being used wisely?

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

overall prerformance ratios
return on assets= net income/ total assets
indicates the firms effectiveness in generating profits from its available assets

liquidity ratios
measures a companys ability to pay its short term debts as they come due

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

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

leverage or solvency ratios
can a company pay its long term debts as they are due?

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

leverage or solvency ratios
timesinterest earned = operating expenses/ interest expenses
calculates the companys ability to meet interest requirements
want a higher number!

activity or efficiency ratios
measures the speed with which various accounts are converted into sales or cash

activity or efficiency ratios
inventory turnover= COGS/ inventory
measures the liquidity of the firms inventory
how quick goods are sold and replenished

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

types of ratio analysis
company history (interanlly)
compare to competitors
compare to industry average (your size)

ratio analysis uses
internally: managers to see where can improve
 externally: potential stakeholders
 current stake holders
 banks (loans)