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Financial Ratio Analysis

The document discusses various financial ratios used in ratio analysis. It defines ratios such as market capitalization, market-to-book ratio, debt-equity ratio, current ratio, quick ratio, gross margin, operating margin, net profit margin, asset turnover, accounts receivable days, interest coverage ratios, return on assets, return on equity, and price-to-earnings ratio. Formulas for calculating each ratio are provided. The ratios are used to analyze the financial position and performance of a company.

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Sehat Tan
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209 views10 pages

Financial Ratio Analysis

The document discusses various financial ratios used in ratio analysis. It defines ratios such as market capitalization, market-to-book ratio, debt-equity ratio, current ratio, quick ratio, gross margin, operating margin, net profit margin, asset turnover, accounts receivable days, interest coverage ratios, return on assets, return on equity, and price-to-earnings ratio. Formulas for calculating each ratio are provided. The ratios are used to analyze the financial position and performance of a company.

Uploaded by

Sehat Tan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 10

Chapter 2

Financial Ratio
Analysis
Example 2.1

• Problem
 Rylan Enterprises has 5 million shares outstanding.
 The market price per share is $22.
 The firm’s book value of equity is $50 million.
 What is Rylan’s market capitalization?
 How does the market capitalization compare to
Rylan’s book value of equity?

2-2
Example 2.1

• Solution
 Rylan’s market capitalization is $110 million
• 5 million shares × $22 share = $110 million.
• The market capitalization is significantly higher than Rylan’s
book value of equity of $50 million.

2-3
2.2 Balance Sheet (cont'd)

• Balance Sheet Analysis

 Market-to-Book Ratio
Market Value of Equity
Market-to-Book Ratio 
Book Value of Equity
• Value Stocks
 Low M/B ratios
• Growth stocks
 High M/B ratios

2-4
2.2 Balance Sheet (cont'd)

• Balance Sheet Analysis


 Debt-Equity Ratio
• Measures a firm’s leverage
Total Debt
Debt-Equity Ratio 
Total Equity
• Using Book Value versus Market Value

2-5
2.2 Balance Sheet (cont'd)

• Other Balance Sheet Information


 Current Ratio
• Current Assets / Current Liabilities

 Quick Ratio
• (Current Assets – Inventories) / Current Liabilities

2-6
2.3 Income Statement (cont'd)

• Income Statement Analysis

• Gross Margin = Gross Profit / Total Sales

• Operating Margin
Operating Income
Operating Margin 
Total Sales
• Net Profit Margin
Net Income
Net Profit Margin 
Total Sales

2-7
2.3 Income Statement (cont'd)

• Asset Turnover = Total Revenue / Total Assets

• Accounts Receivable Days


Accounts Receivable
Accounts Receivable Days 
Average Daily Sales

2-8
2.3 Income Statement (cont'd)

 Interest Coverage Ratios


• EBIT / Interest Expense
• Operating Income / Interest Expense
• EBITDA / Interest Expense

2-9
2.3 Income Statement (cont'd)

 Investment Returns
• ROA
 Net Income / Total Assets
• ROE
Net Income
Return on Equity 
Book Value of Equity

 Valuation Ratios
• P/E Ratio
Market Capitalization Share Price
P / E Ratio  
Net Income Earnings per Share

2-10

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