【正文】 y or at one of its primary suppliers’ facilities ?If the accounts payable period is too long, suppliers could raise their prices, charge interest (often at very high rates), or even refuse to supply the firm on credit. Also, workers may get restless if they have to wait longer to receive their paychecks. Managing turnover ratios means managing strategic tradeoffs. 15 Leverage Ratios Definitions * All three ratios here are called “l(fā)everage” ratios by different people, so be sure to understand which ratio is being used when someone is talking about leverage Leverage ratios use line items from the balance sheet. Ratios* Definitions DuPont leverage ratio Assets Equity Debt to equity ratio Longterm debt Equity Debt to total capital or debt to total assets ratio Total liabilities Debt + equity Total liabilities Assets = 16 Leverage Ratios Description ?Money can be raised from debt sources (banks, bond markets) or equity sources (stockholders) ?Leverage ratios reflect both the financing policies of the firm and the riskiness of the business ?In order to analyze a firm’s leverage ratios, one needs to understand the definitions of debt and equity Leverage ratios measure the respective claims of debt and equity holders. 17 Debt Versus Equity ?Contractual payments over the life of the loan ?Investor legally guaranteed full return of principle plus interest – nothing above that ?In case of liquidation, debtor has preferential claim on proceeds from sale of assets ?No guaranteed payments from mon stock ?Investor “owns” part of firm –right to appreciation of firm’s value ?In case of liquidation, equity owner takes what is left (may be nothing) Debt and equity have very different characteristics. Debt = anything that contractually requires payments to be made before the equity holders have access to the firm’s earnings Equity = the value of the firm left over after all the debt holders have been paid Lower risk to investor。 investor demands lower return Higher risk to investor。 an individual stockholder has no influence over when he/she actually receives the return that he/she has earned ?It is a bination of profitability, turnover, and leverage ratios Return on equity, ROE, is the acid test of success for a business. 25 DuPont Formula By separating ROE into its ponents, one can gain insight into how to improve the performance of a business. ROE = Profit after tax Equity ROE = Profit after tax Sales Sales Assets Assets Equity X X Return on Assets Leverage ROS Asset turnover This is known as the DuPont formula ROE = Profitability X Turnover X Leverage 26 Agenda ?Using ratios ?Types of key ratios –profitability –turnover –leverage –liquidity –coverage ?Return on Equity ?Ratio exercises ?Forecasting exercise ?Abbreviations ?Key takeaways 27 Unidentified Industries Exercise The objective of this exercise is to test your understanding of financial ratios. Exercise: The balance sheets (in percentage form) and selected ratios for six industries are given on the following page. Please match each of the six industries to the financial information ?Coal mining ?Grocery stores ?Hotels and motels ?Legal services ?Packaged software ?Potato chips and snacks 28 Unidentified Industries Exercise Data Industry Balance Sheet (%) A B C D E F *Ratios do not tie to balance sheet items because they were calculated using a slightly different data set. **This is NOT inventory turns. Inventory turns would be COGS to inventory. ***Sales to assets Source: Industry Norms Key Business Ratios, Dun Bradstreet ? Cash ? Accounts receivable ? Notes receivable ? Inventory ? Other current ? Total current assets ? Fixed assets ? Other noncurrent assets ? Total assets ? Accounts payable ? Bank loans ? Notes payable ? Other current liabilities ? Total current liabilities ? Other longterm liabilities ? Deferred credits ? Net worth ? Total liabilities worth Ratios* ? Quick ratio (times) ? Current ratio (times) ? Total liabilities to worth (%) ? Collection period (days) ? Sales to inventory (times)** ? Assets turns*** (times) ? Gross margin (%) ? Return on sales (%) ? Return on assets (%) ? Return on equity (%) % % % 127% days 64% 7% 5% 14% % % % 87% days 38% 3% 7% 16% % % % 62% days 29% 2% 5% 7% % % % 93% days 22% 1% 6% 13% % % % 67% days 57% 12% 20% 29% % % % 74% days 59% 6% 10% 19% 29 Unidentified Industries Exercise Answer Characteristics: Financial ratios: Companies: Hotels and Motels ? Very high fixed assets ? Low inventory ? Short collection period ? Low asset turnover ? High gross margin ? High leverage ? Fixed assets = 65% ? Inventory = 1% ? Collection period = 9 days ? Asset turns = ? Gross margin = 64% ? Total liabilities to worth = 127% A Coal Mining ? Very high fixed assets ? Low inventory ? Long collection period ? Fixed assets = 52% ? Inventory = 2% ? Collection period = 52 days B Potato Chips Snacks ? Low percentage of cash ? Long collection cycle ? Cash = 5% ? Collection = 31 days C Grocery Stores ? High percentage of cash ? Low accounts receivable ? Short collection per