Appendix II: Financial Analysis in Case Studies

Table A-1    Profitability Ratios Ratio Formula What it Shows 1. Return on total assets Profits after taxes ÷ Total Assets The net return on total investments of the firm or or Profits after taxes + interest ÷ Total Assets The return on both creditors' and shareholders' investments 2. Return on stockholder's equity (or return on net worth) Profits after taxes ÷ Total stockholder's equity How profitable the company is utilizing shareholders' funds 3. Return on common equity Profits after taxes - preferred stock dividends ÷ Total stockholder's equity - par value of preferred stock The net return to common stockholders 4. Operating profit margin (or return on sales) Profits before taxes and before interest ÷ Sales The firm's profitability from regular operations 5. Net profit margin (or net return on sales) Profits after taxes ÷ Sales The firm's net profit as a percentage of total sales

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Table A-2    Liquidity Ratios Ratio Formula What it Shows 1. Current ratio Current assets ÷ Current liabilities The firm's ability to meet its current financial liabilities 2. Quick ratio (or acid-test ratio) Current assets - inventory ÷ Current liabilities The firm's ability to pay off short-term obligations without relying on sales of inventory 3. Inventory to net working capital Inventory ÷ Current assets - current liabilities The extent to which the firm's working capital is tied up in inventory

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Table A-3    Leverage Ratios Ratio Formula What it Shows 1. Debt-to-assets Total debt ÷ Total Assets Total borrowed funds as a percentage of total assets 2. Debt-to-equity Total debt ÷ Total shareholders' equity Borrowed funds versus the funds provided by shareholders 3. Long-term debt-to-equity Long-term debt ÷ Total shareholders equity Leverage used by the firm 4. Times-interest-earned (or coverage ratio) Profits before interest and taxes ÷ Total interest charges The firm's ability to meet all interest payments 5. Fixed charge coverage Profits before taxes and interest + lease obligations ÷ Total interest charges + lease obligations The firm's ability to meet all fixed-charge obligations including lease payments

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Table A-4    Activity Ratios Ratio Formula What it Shows 1. Inventory turnover Sales ÷ Inventory of finished goods The effectiveness of the firm in employing inventory 2. Fixed assets turnover sales ÷ Fixed assets The effectiveness of the firm in utilizing plant and equipment 3. Total assets turnover Sales ÷ Total assets The effectiveness of the firm in utilizing total assets 4. Accounts receivable turnover Annual credit sales ÷ Accounts receivable How many times the total receivables has been collected during the accounting period 5. Average collecting period Accounts receivable ÷ Average daily sales The average length of time the firm waits to collect payment after sales

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Table A-5    Shareholders' Return Ratios Ratio Formula What it Shows 1. Dividend yield on common stock Annual dividend per share ÷ Current market price per share A measure of return to common stockholders in the form of dividends 2. Price-earnings ratio Current market price per share ÷ After-tax earnings per share An indication of market perception of the firm, usually, the faster-growing or less risky firms tend to have higher PE ratios than the slower-growing or more risky firms 3. Dividend payout ratio Annual dividends per share ÷ After-tax earnings per share An indication of dividends paid out as a percentage of profits 4. Cash flow per share After-tax profits + depression ÷ Number of common shares outstanding A measure of total cash per share available for use by the firm

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Notes

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