【正文】 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.15Ratio AnalysisBOS 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 leverageLeverage ratios use line items from the balance sheet.Ratios* DefinitionsDuPont leverage ratio AssetsEquityDebt to equity ratio Longterm debtEquityDebt to total capitalor debt to total assets ratioTotal liabilitiesDebt + equityTotal liabilitiesAssets=16Ratio AnalysisBOS 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 equityLeverage ratios measure the respective claims of debt and equity holders.17Ratio AnalysisBOS 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 earningsEquity = the value of the firm left over after all the debt holders have been paidLower risk to investor。investor demands higher return18Ratio AnalysisBOS 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 debtEquity 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 sheet19Ratio AnalysisBOS 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?20Ratio AnalysisBOS 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 financeDebt, if it used to finance capital expansions of the panyNot debt, if it used to finance working capitalDebt.Not debt. Because they are cancelable, they are not contractual obligationsDebt. 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 metArgument for debt there is a contractual obligation to pay dividends on preferred stock before mon stock dividend payments can be madeNot debt. It is equity? Common stockDebt, but debatable. Often considered debt given longterm nature? Deferred tax? Preferred stock21Ratio AnalysisBOS Liquidity and Coverage Ratios DefinitionsLiquidity ratios use line items from the balance sheet. Coverage ratios use line items from the ine statement.Ratios DefinitionsCurrent ratio Current assetsCurrent liabilitiesQuick ratio(acid test)Cash + marketable securities + receivablesCurrent liabilitiesInterest coverage ratio Earnings before interest and taxesInterest expenseFixed charge coverage Earnings before interest and taxesAll essential payments (including lease payments)Liquidity:Coverage:22Ratio AnalysisBOS 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 1Liquidity ratios measure the firm’s ability to meet its shortterm obligations. Coverage ratios measure the firm’s ability to meet its longterm obligations.23Ratio AnalysisBOS Agenda ?Using ratios?Types of key ratios–profitability–turnover–leverage–liquidity–coverage?Return on Equity?Ratio exercises?Forecasting exercise?Abbreviations?Key takeaways24Ratio AnalysisBOS 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 to note that not all of the earnings are paid to the stockholders when they are earned.8 Only some portion of the earnings will be returned now in the form of dividends. The remainder (retained earnings) will be reinvested in the pany to finance growth8 The size of the divided is decided by the board of directors。