Chapter 3 |
Importance of internal financial analysis | Evaluate performance of employee. Compare performance. Prepare financial projections. Evaluate own performance with competitor
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Who needs to view external financial analysis | Bank / lender / supplier/ credit-rating agency / professional analysis / individual investor |
Benefit of higher liquidity in investment | Enable the firm to repay current liabilities in time because of higher rate of return from investment |
Type / Use of Ratio | |
Measurement of Liquidity | Liquidity ratio is to measure the elasticity or flexibility of company.
Method to measure: Formula: Current assets / current liabilities
Acid-test was a test to measures whether the company’s short-term assets is enough and sufficiency to solve short-term liabilities. Formula: (cash+ Account receivable+ short-term investment)/current liabilities (current assets-inventory)/ current liabilities
Formula: (current assets-inventory)/current liabilities. |
The performance benchmark for firm’s financial | Trend analysis Comparing the recent financial ratios with past financial ratios of firm.
Peer group comparison Compare and consider the average benchmark between the same industry such as AMD and intel |
Limitation of ratio analysis | Choosing of the industry benchmark Same industry but different situation sometime, non-accurate. Industry average not meeting desire target. Uncontrol changing like seasonal changes. Financial statement has higher quality. Accounting practice different in every firm
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Average collection period 应收账款平均收帐期 | Examining the liquidity of accounts receivable and inventories to see how long it takes the firm to convert its accounts receivables and inventories into cash. 应收账款平均收账期是指反映流动资产中应收账款的回笼速度
=Accounts Receivable / (annual credit sales / 365) =Account receivable / Daily credit sales |
Account Receivable Turnover Ratio | = Annual credit sales / accounts receivable |
Inventory Turnover | =cost of goods sold / inventory |
Book value | =common shareholders equity / common shares outstanding |
Day’s sales in inventory | Inventory turnover ratio / 365 |
Capital structure ratios | Degree of debt and equity in the combination. There are two type of capital structure ratios which is:
Debt ratio = Total liabilities / total assets
Time interest earned. =net operating income / interest expense
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Asset management efficiency ratios | Measures firm effectiveness in using their asset to generate sales. |
Total asset turnover ratio | =sales / total assets |
Fixed asset turnover ratio | =Sales / net plant and equipment |
Operating profit margin | =net operating income / sales |
Operating return on assets | =net operating income / total assets |
Times interest earned. | To measures the compatibility of the company, resolve the long-term debt. The higher rate, the better.
Formula: =Net operating income or EBIT / interest expense |
Return on Equity | =net income / common equity |
Price-earnings Ratio | Useful to compare two different stock with different price by standardizing stock price by earnings. =Market price per share / earning per share |
Market to book ratio | =Market price per share / book value |
| END of chapter 3 |
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