Ratio Analysis, Apuntes de Economía

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Ratio analysis

CHAPTER 3

Analysis of Financial Statements

Standardize numbers; facilitate

comparisons

Show evolution trough the time of

the ratio

Used to highlight weaknesses and

strengths

Why are ratios useful?

Debt management: Do we have the

right mix of debt and equity?

Profitability: Do sales prices exceed

unit costs, and are sales high

enough as reflected in ROE, and

ROA?

Calculate the firm’s forecasted current

and quick ratios

CR =

QR =

CA

CL

CA - Inv.

CL

Current Ratio

Quick Ratio

or Acid Test

Receivables

Average sales per day

DSO is the average number of days

after making a sale before receiving

cash.

DSO =

Receivables

Sales/

Fixed Assets and Total Assets

Turnover Ratios

Fixed assets

turnover

Sales

Net fixed assets

Total assets

turnover

Sales

Total assets

(More…)

Profit Margin (PM)

PM = =

Net Income

Sales

Return on Assets (ROA)

and Return on Equity (ROE)

ROA =

EBIT

Total assets

(More…)

ROE =

Net income

Common equity

Return on Assets (ROA)

and Return on Equity (ROE)

(More…)

 ROE depends on:

 ROA: Managements on assets

 Financial structure: liabilities and

debts

 ROA average debt t   tax rate 

Equity

Total Debt

ROE ROA  













   cos 1