【正文】 nt 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 ratios must be examined over time and/or against its petitors’ ratios. Historical parison Competitive parison ?Compare present ratios with same pany39。 investor demands higher return 18 Debt Questions Debt and Equity Debt in Leverage Ratios ?Bain typically looks only at longterm debt (debt with a term of 1 year or more) ?Accountants measure debt as shortterm debt plus long term debt Equity in Leverage Ratios ?Bain typically uses the market value of equity (., the share price multiplied by the number of shares). Others may use the book value of equity, which is the amount shown on the balance sheet 19 Debt Questions ?Accounts payable ? ?Shortterm debt ? ?Longterm debt ? ?Cancelable leases ? ?Noncancelable leases ? ?Preferred stock ? ?Common stock ? ?Deferred tax ? Would you define the following as debt? 20 Debt Answers ?Accounts payable ?Shortterm debt ?Longterm debt ?Cancelable leases ?Noncancelable leases Some items are clearly debt, others are clearly not debt, still others are debatable. Not debt. It is part of working capital, and is “secured” by the inventory and receivables that it is used to finance Debt, if it used to finance capital expansions of the pany Not debt, if it used to finance working capital Debt. Not debt. Because they are cancelable, they are not contractual obligations Debt. Because they are noncancelable, they are contractual obligations. (For all publicly traded US panies, the present value of all the noncancelable lease payments must be disclosed in balance sheet footnotes.) Debatable Argument for equity contractual obligations to pay dividends on preferred stock are met after debtholders’ claims are met Argument for debt there is a contractual obligation to pay dividends on preferred stock before mon stock dividend payments can be made Not debt. It is equity ? Common stock Debt, but debatable. Often considered debt given longterm nature ? Deferred tax ? Preferred stock 21 Liquidity and Coverage Ratios Definitions Liquidity ratios use line items from the balance sheet. Coverage ratios use line items from the ine statement. Ratios Definitions Current ratio Current assets Current liabilities Quick ratio (acid test) Cash + marketable securities + receivables Current liabilities Interest coverage ratio Earnings before interest and taxes Interest expense Fixed charge coverage Earnings before interest and taxes All essential payments (including lease payments) Liquidity: Coverage: 22 Liquidity and Coverage Ratios Description ?Acceptable values for these ratios differ by industry. However, when the current ratio or coverage ratios fall below 1 that means the firm is unable to meet its obligations ?It is a useful exercise to calculate how much revenue could drop (or costs rise) before coverage would drop below 1 Liquidity ratios measure the firm’s ability to meet its shortterm obligations. Coverage ratios measure the firm’s ability to meet its longterm obligations. 23 Agenda ?Using ratios ?Types of key ratios –profitability –turnover –leverage –liquidity –coverage ?Return on Equity ?Ratio exercises ?Forecasting exercise ?Abbreviations ?Key takeaways 24 Return on Equity ?Return on equity is defined as profit after tax (earnings) divided by equity. It relates economic outputs (profit) to inputs (equity). ?It tells us the amount of profits the pany earned on each dollar the stockholders invested in the firm. –It is important