Chapter 3 Analyzing Financial Statement Five major areas to analyze. (1) (2) (3) (4) (5) (1) a) Liquidity Position Management of Assets Management of Debt Company's Profitability Market's View of Company Liquidity Ratios - use to investigate the relationship between a firm's current (shortterm) assets and current (short-term) liabilities. Current Ratio = Current Assets Current Liabilities Current Assets - Inventory Current Liabilities Cash + Marketable Securities Current Liabilities
Quick Ratio (Acid-test) Cash Ratio
Asset Management Ratios - Use to evaluate how efficiently management employs assets.
Inventory Management a) b) Inventory Turnover Days’ ...view middle of the document...
Profit Margin Basic Earnings Power Return on Assets (ROA) Return on Equity (ROE) Dividend Payout = = = = = Net Income Sales EBIT Total Assets Net Income Total Assets Net Income Common Stockholders’ Equity Common Stock Dividends Net Income
(5) a) b) (b)
Market Ratios - use to determine how market views company Market-to-Book = Stock Price Book Value / share Stock Price EPS PE Ratio e(gEPS)
Price-Earnings (PE) = PEG =
Du Pont Analysis
The DuPont equation provides us a method to evaluate the components that make up ROE. ROE = Net Income Common Stock Equity
ROE = (ROA)*(Equity Multiplier Ratio) remember: ROA = Net Income Total Assets Total Assets Common Stock Equity
Equity Multiplier Ratio =
shows the asset base supported by common equity; high equity multiplier shows a lot of risk or may be due to low market value relative to book value. ROE = ROE = (ROA) Net Income Total Assets * * (Equity Multiplier Ratio) Total Assets Common Stock Equity
ROA = (Profit Margin)*(Total Asset Turnover) where: Profit Margin Total Asset Turnover = = Net Income Sales Sales Total Assets Extended DuPont Equation may be most beneficial to use as analysis tool. ROE = PROFIT * MARGIN Net Income Sales * TOTAL ASSET Sales Total Assets * EQUITY MULTIPIER RATIO Total Assets Common Stock Equity
ROE is separated into profitability of each $ of sales (profit margin),...