I am having problems on the formulas were used for yellow highlights in year 1. What I am trying to say is this.
| KEY FINANCIAL STATEMENT RATIOS | rev. 3-19-2010 | rev. Feb 2010 | |||||||||||||||||||
| Liquidity ratios | Example: | ||||||||||||||||||||
| A “2.0 to 1” ratio means that there is | If current liabilities are rising faster | ||||||||||||||||||||
| Current Ratio | Current Assets | 2.0 to 1 | $2.00 of current assets for every $1 | than the current assets from which | |||||||||||||||||
| Current Liabilities | in current liabilities, which suggests | they must be paid, company could | |||||||||||||||||||
| that short-term creditors can be | become insolvent (unable to pay | ||||||||||||||||||||
| reasonably sure of being paid. | its debts) and eventually bankrupt. | ||||||||||||||||||||
| Quick Ratio | Quick Assets * | 0.9 to 1 | Indicates extent to which claims of | If Current Ratio is OK, but Quick Ratio | |||||||||||||||||
| “Acid Test” | Current Liabilities | short-term creditors are covered by | is low or declining, the cause may | ||||||||||||||||||
| “quick” assets*. | be excessive nonliquid inventory. | ||||||||||||||||||||
| * Quick assets include Cash, Marketable Securities, and Accounts Receivable (excludes Inventory) | |||||||||||||||||||||
| Asset Management Ratios | |||||||||||||||||||||
| Number of times per year | If the turnover ratio is decreasing | ||||||||||||||||||||
| Accts Receivable | Sales (credit only) | 6.0 times | receivables were generated | or avg number of days to collect is | |||||||||||||||||
| Turnover | Accounts receivable | and then paid (“turned over”) | increasing or is substantially greater | ||||||||||||||||||
| than credit terms (e.g., “30 days, net”), | |||||||||||||||||||||
| Avg Number of | 365 (days in year) | 60.8 days | Number of days customers are | then credit and collection policies may | |||||||||||||||||
| Days to Collect | A/R turnover ratio | taking to pay | need to be strengthened. | ||||||||||||||||||
| Number of times merchandise | |||||||||||||||||||||
| Inventory | Cost of Goods Sold* | 4.0 times | items are sold and restocked | ||||||||||||||||||
| Turnover | Inventory* | (“turned over”) per year. | If the turnover ratio is decreasing | ||||||||||||||||||
| or number of days in Inventory is | |||||||||||||||||||||
| * Some publications use “Sales” as the numerator, and/or average inventory as denominator | increasing , inventory may becoming | ||||||||||||||||||||
| outdated and possibly overstated | |||||||||||||||||||||
| Avg Number of | 365 (days in year) | 91.3 days | Number of days inventory remains | ||||||||||||||||||
| Days in Inventory | Inv. turnover ratio | unsold | |||||||||||||||||||
| Debt (Leverage) (Long-term Solvency) Ratios | |||||||||||||||||||||
| Debt to | Total Liabilities | 0.50 | The portion of the total financing | Debt to Assets and Debt to Equity | |||||||||||||||||
| Assets | Total Assets | supplied by creditors as opposed to | are alternative benchmarks that | ||||||||||||||||||
| the owner-stockholders. | measure long-term solvency. Higher | ||||||||||||||||||||
| ratios (high leverage) mean greater | |||||||||||||||||||||
| Debt to | Total Liabilities | 1.5 | The financing supplied by creditors | risk that cash flows from operations | |||||||||||||||||
| Equity | Total Equity | as compared to financing supplied | will be insufficient to cover interest | ||||||||||||||||||
| by the owner-stockholders. | and principal payments. | ||||||||||||||||||||
| Times interest | EBIT* | 3.2 | Measures the extent to which operating | Low ratio = low margin of safety, | |||||||||||||||||
| Earned | Interest expense | income can decline before firm is | and can make it difficult to borrow. | ||||||||||||||||||
| unable to meet interest payments | |||||||||||||||||||||
| * EBIT means “Earnings before Interest and Taxes” | |||||||||||||||||||||
| Profitability Ratios (not applicable if net loss) | |||||||||||||||||||||
| Net Profit | Net Income | 5.1% | Net income as a percentage of sales. | Low percentage = low safety | |||||||||||||||||
| Margin (%) | Sales (net) | If trend is down, product costs and/or | margin: higher risk that a decline in | ||||||||||||||||||
| operating expenses are rising faster | sales will erase profits and result | ||||||||||||||||||||
| than sales. | in a net loss. | ||||||||||||||||||||
| Gross Profit | Gross Profit | 35.2% | Gross Profit as a percentage of sales. | A low or declining Gross Profit % | |||||||||||||||||
| on Sales (%) | Sales (net) | If low or declining, product costs may | indicates less ability to sell goods | ||||||||||||||||||
| be increasing and/or selling prices | at intended selling price, or rising | ||||||||||||||||||||
| decreasing (steeper discounts). | cost of goods, or both. | ||||||||||||||||||||
| Return | Operating Income* | 15.3% | Measures how well management | A low or declining rate could mean | |||||||||||||||||
| on Assets (%) | Total Operating Assets | is managing assets to generate | that assets are not being utilized | ||||||||||||||||||
| aka ROI | profit from operations. | effectively. | |||||||||||||||||||
| Return | Net Income ** | 18.4% | Measures rate of return on stockholders | Low return could be caused by high | |||||||||||||||||
| on Equity (%) | Total Equity ** | investment. (However, “dividend yield” | debt, i.e., high interest expense. | ||||||||||||||||||
| for stockholders is generally much less.) | |||||||||||||||||||||
| * Some publications use Net income (after tax) instead of Operating income (i.e., earnings before interest and income tax, or EBIT) | |||||||||||||||||||||
| ** If preferred stock exists, subtract Preferred Dividends from Net Income, and also subtract Preferred Stock from Total Equity | |||||||||||||||||||||
| Market Value Ratios | |||||||||||||||||||||
| Earnings per | Net Income * | $1.23 | EPS is the “real” measure of profitability | EPS can decline despite an | |||||||||||||||||
| Share (EPS) | Common shares outstanding | used by potential investors (not used | increase in total earnings and thus | ||||||||||||||||||
| by creditors). | drive down the market price per | ||||||||||||||||||||
| * If preferred stock exists, subtract Preferred Dividends from Net Income. | share. | ||||||||||||||||||||
| Price/Earnings | Market Price | 16.5 times | The multiple-times-earnings that | High P/E ratio means that investors | |||||||||||||||||
| Ratio (P/E) | EPS * | investors are willing to pay, based on | perceive good growth potential—but | ||||||||||||||||||
| their perception of future share price. | they could be (and often are) wrong. | ||||||||||||||||||||
| * If EPS is negative, ratio is “not applicable” | |||||||||||||||||||||
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