Chapter 6:

Assessment of the Firm's Operating Efficiency and Financial Position Through Financial Statements Analysis

I. Ratios Used To Evaluate Short-Term FP(Short-Term Solvency and Liquidity)

Total Current Assets

1 Current Ratio =
Total Current Liabilities
Cash+Marketable Securities
Total Quick Assets*
2 Acid-test ratio or quick ratio = +AR(net)
Total Current Liabilities
Working Capital
3a Working Capital to Total assets =
Total Assets
3b Working Capital Current Assets less Current Liabilities
Cash+Marketable Securities+Cash Flow from
4 Cash Flow Liquidity Ratio = Operating Activities
Current Liabilities
Quick Assets
5 Defensive Interval Ratio =
Projected Daily Operational Expenses
II. Ratios Used to Evaluate Asset Liquidity and Management Efficiency
Net Credit sales* or Net Sales if net Credit sales
1a Trade Receivable turnover =
Ave. Trade Receivable(net) figure is not available

Average Collection period or number 360 days 365 days

1b =
of days' sales uncollected Receivable Turnover AR Turnover
or or
Accounts Receivable Average Accounts Receivable
=
Net Sales/360 Average daily sales
2 Inventory Turnover
COGS
a Merchandise turnover =
Ave. Merchandise Inventory
COGS
b Finished Goods
Ave. Finished Goods Inventory
COGM
c Goods in process turnover =
Ave. Goods-in Process Inventory
Raw Materials Used
d Raw materials turnover =
Ave. Raw Materials Inventory
360 days 365 days
e Days supply in inventory =
Inventory turnover Inventory turnover
Net Sales
3 Working Capital turnover =
Ave. Working Capital
Percent of each current asset to total Amount of each current asset item
4 =
current assets Total Current Assets
Cost of Sales + OPEX + Income Taxes + Other
Expenses(net) (excluding depreciation and
5 Current Assets turnover =
amortization)
Ave. Current Assets

Net purchases
6 Payable turnover =
Ave. Accounts Payable
Ave.Conversion Period of Inventories +Ave.
Collection Period of Receivable + Days Cash
7 Operating Cycle =
Ave. Cash balance
Cash operating costs /360 days
Ave. Cash balance
8 Days Cash =
Cash operating costs /360 days
Net cash from operating activities - Cash used
9 Free Cash flow = for investing activities and Dividends
Net Sales
10 Investment or assets turnover =
Ave. Total Investment or Total Assets
Sales to fixed assets(plant assets Net Sales
11 =
turnover) Ave. Fixed Assets (net)
Total Assets
12 Capital intensity Ratio =
Net Sales
III. Ratio Used to Evaluate Long-Term Financial Position or Stability/Leverage
Total Liabilities
1 Debt Ratio =
Total Assets
Total Equity
2 Equity Ratio =
Total Assets
Total Liabilities
3 Debt to equity ratio =
Total Equity
Fixed Assets (net)
4 Fixed Assets to long-term liabilities =
Total Long-term Liabilities
Fixed Assets(net)
5 Fixed assets to total equity =
Total Equity
6 Fixed Assets(net)
Fixed Assets to Total Equity =
Total Assets
Book value per share of ordinary Ordinary shareholders' equity
7 =
shares No. of outstanding ordinary shares
Net Income before Interest and Taxes
8 Times interest earned =
Annual Interest Charges
Times preferred dividend requirement Net Income After Taxes
9 =
earned Preferred Dividends Requirement
Net Income before Taxes and Fixed Charges *Sinking fund payment before
10 Times fixed charges earned = Fixed Charges (Rent+Interest+Sinking Fund taxes = Sinking fund payment
payment before taxes*) after taxes 1-tax rate
IV. Ratios Used to Measure Profitability and Returns to Investors
Gross Profit
1 Gross Profit margin =
Net Sales
Operating Profit
2 Operating Profit margin =
Net Sales
Net profit margin (Rate of return on Net Profit
3 =
net sales) Net Sales
Cash Flow for operating activities
4 Cash Flow Margin =
Net Sales

Net Profit
= *if there is interest-bearing debt,
Ave. Total Assets Rate of return on assets is
5 Rate of return on Assets (ROA)* Alternative formula: computed as follows:
Net Income+[Interest expense (1-
= Asset Turnover x Net Profit margin Tax Rate)]

**ROE = Return on Assets x Equity

Net Income
6 Rate of return on equity ** = Multiplier
Ave. Ordinary Equity Equity Multiplier = 1/Equity Ratio
Net income less preference dividends
7 Earnings per share = requirement
Ave. ordinary shares outstanding
Market Value per share of Ordinary Shares
8 Price/earnings ratio =
Earnings per share of Ordinary Shares
Dividends per share
9 Dividend Payout =
Earnings per share
Annual Dividends per share
10 Dividend Yield =
Market Value per share of Ordinary Shares
Dividends Paid/Declared
11 Dividends per share =
Ordinary Shares outstanding

Net Income
12 Rate of Return on ave. current assets =
Ave. Current Assets
Rate of return per turnover of current Rate of return on Ave. Current Assets
13 =
assets Current Assets turnover
OTHERS:Analysis of Asset Liquidity and Asset Management Efficiency

I Analysis of Liquidity or Short Term Solvency

Current Assets
Current Ratio =
Current Liabilities
Quick Assets
Quick or Acid test ratio = (Cash+Marketable Securities+AR,net)
Current Liabilities
Cash+Marketable Securities+Cash Flow from
Cash Flow Liquidity Ratio = Operating Activities
Current Liabilities
II Analysis of Asset Liquidity and Asset Management Efficiency
Net Sales* *credit sales can be substituted
Accounts Receivable Turnover =
Average AR balance
Average Collection Period 365 days
=
AR Turnover
or
Average AR
=
Average daily sales
Inventory Turnover COGS
=
Average inventory balance
Average Sale Period 365 days
=
Inventory turnover
Fixed Asset Turnover Net Sales
=
Ave. net property, plant and equipment
Total Asset Turnover Net Sales
=
Average Total Assets
III Analysis of Leverage: Debt Financing and Coverage
Debt Ratio Total Liabilities
=
Total Assets
Debt to Equity Ratio Total Liabilities
=
Total Equity
Times Interest Earned Operating Profit
=
Interest Expense
Fixed Charge Coverage Operating Profit + Lease payments
=
Interest expense + Lease payments
IV Operating Efficiency and Profitability
Gross Profit Margin Gross Profit
=
Net Sales
Operating Profit Margin Operating Profit
=
Net Sales
Net Profit Margin Net Income
=
Net Sales
Cash Flow Margin Cash flow from operating activities
=
Net Sales

Return on Investment on Assets(ROA) Net income

=
Average Total Assets
or
= Net Profit Margin x Total Asset Turnover
ROA - with interest bearing debt Net Income + [Interest {1-Tax rate)]
=
Average Total Assets
Return on Equity (ROE) Net Income
=
Average Stockholders' Equity
or
= ROA x Financial Leverage or Equity Multiplier
Equity Multiplier 1
=
Equity Ratio
Financial Leverage Index Return on Equity (ROE)
=
Return on Assets (ROA)
 Other Ratios use d to Measure Returns to Investors
a Earnings per share (EPS)
Basic EPS Net Income
= Weighted Average number of ordinary shares
outstanding
Diluted EPS Net Income (as adjusted)
= Weighted Average number of ordinary shares
outstanding and potential diluters
b Price Earnings Ratio (P/E) Market Price of ordinary shares
=
Earnings per share
c Dividend payout ratio Dividends per share
=
Earnings per share
d Dividend yield Dividends per share
=
Market value per share
DUPONT DISAGREEGATION ANALYSIS

CHAPTER 7: Cash Flow Analysis

Financial Liquidity
Net Cash Provided by Operating
Current Cash
Activities =
Average Current Liabilities Debt Coverage Ratio
Financial Flexibility
Net Cash Provided by Operating
Cash Debt
Activities =
Average Total Liabilities Coverage Ratio
Free Cash Flow
Net Cash provided by operating Activities
Less: Capital Expeditures
Less: Dividends
Free Cash Flow