【正文】 Author: Collins Qian Ratio Analysis March 1998 1 Agenda ?Using ratios ?Types of key ratios –profitability –turnover –leverage –liquidity –coverage ?Return on Equity ?Ratio exercises ?Forecasting exercise ?Abbreviations ?Key takeaways 2 Analyzing Ratios Ratios in isolation are meaningless. A pany39。s ratios must be examined over time and/or against its petitors’ ratios. Historical parison Competitive parison ?Compare present ratios with same pany39。s historical ratios ?In stable situations, historical ratios may be used to project future performance ?Compare a pany’s ratios with similar firms’ ratios or with industry averages at the same point in time Look for trends Look at relative performance 3 The Art of Ratio Analysis ?Which ratios are most important in a given situation? ?What items should be included/excluded in calculating the ratios? ?How much influence does management have over the ratios? ?What do the ratios say about the firm’s strategy? Ratio analysis is an art as well as a science. 4 The Need for Judgment Potential Problem ?Management can substantially influence financials in the short term Implications ?Need to use judgment to understand financials Ratio analysis requires keen judgment. ?Financial statement data is historical, not pro forma ?Crosspany parisons are meaningless if adjustments are not made for different accounting conventions ?The timing of the reporting period influences funds flows and requirements ?Need to understand that history does NOT necessarily predict future ?Need to be very sensitive about industryspecific seasonality and cyclicality ?Need to standardize across panies to adjust for different accounting methods 5 Agenda ?Using ratios ?Types of key ratios –profitability –turnover –leverage –liquidity –coverage ?Return on Equity ?Ratio exercises ?Forecasting exercise ?Abbreviations ?Key takeaways 6 Types of Ratios Ratios help us understand how well a pany is performing. Specifically, how much return is it generating with what level of risk? How well does the pany manage costs relative to revenues? Return Risk Coverage ? Interest charge ? Fixed charge coverage Liquidity ? Current ratio ? Quick ratio Leverage ? Asset to equity ? Debt to equity ? Debt to total capital Turnover ? Receivables ? Inventory ? Payables ? Asset Profitability ? Operating margin ? ROS ? Gross margin How effective is the pany in managing its resources? What are the respective claims of debt and equity owners? How risky is the business? Is the pany able to meet its shortterm obligations? Is the pany able to meet its longterm obligations? 7 Profitability Ratios Definitions * This is not a profitability ratio, but it does impact ROS Profitability ratios use line items from the ine statement. Ratios Definitions Gross profit margin (or gross margin) Sales cost of goods sold Sales Operating profit margin (or operating margin) Earnings before interest and taxes Sales Return on sales (ROS) Profit after tax Sales Effective tax rate* Taxes Profit before tax 8 Profitability Ratios Description ?Profitability (or margin) ratios are a function of both the industry and a pany39。s position within the industry – boundaries are set by the operating characteristics of the industry –within these boundaries profitability ratios are determined by a player’s relative position ?Bain typically uses gross profit and operating profit to measure profitability – ROS can be altered by nonoperating activities, such as sources of financing or tax rate manipulations ?Extraordinary items, because they are for unusual events, such as discontinued items or asset sales, are excluded when we analyze the performance of the base business Profitability ratios measure a firm’s ability to manage costs relative to revenues. 9 Profitability Ratios Over Time ?Gross profit margin should stay constant or increase because cost of goods sold should be a constant percent of sales or should decrease as pany gets price increases and/or volume discounts ?Operating margin should increase as fixed administrative and sales costs are spread over a greater number of units ?Effective tax rate should stay constant or decrease since a larger firm is able to take advantage of more tax shelters As a pany grows, its return on sales should increase. Higher return on sales 10 Profitability Ratios Market Leader ?Gross profit margin should be higher since a market leader can typically charge more for its goods and/or receive the greatest volume discounts from suppliers ?Operating profit margin should be significantly higher, because higher volume means fixed costs are spread over more units and because the gross profit margin is higher ?There should be no significant difference in the effective tax rate ?Return on sales should be significantly higher because the operating margin should be significantly higher The market leader in an industry should have the best profitability ratios. This is consistent with the ROS/RMS concept which says that panies with high relative market share have high returns on sales 11 Turnover Ratios Definitions Note: Average=(Year Beginning+Year End)/2 * Sales is often a good proxy ** Cost of goods sold is often a good proxy *** Typically we use 365 days (., 1 year) for the period Turnover ratios use a bination of ine statement and balance sheet items. Ratios Definitions Receivables turnover Credit sales in period* Accounts receivable average balance Inventory turnover Cost of goods sold in period Average inventory in period Payabl