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(1) RATIOS FORMULA .pdf

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(1) RATIOS FORMULA .pdf

  1. 1. FIN242 – FUNDAMENTAL OF FINANCE CHAPTER 2: RATIOS PREPARED BY: HUSNIZAM HOSIN, UITM JOHOR 1 FINANCIAL ANALYSIS: RATIOS 1. LIQUIDITY RATIOS RATIOS FORMULA WORKINGS INDUSTRY AVERAGE COMMENT SYMBOL EVALUATION Current Ratio (CR) Current Assets Current Liabilities POOR / GOOD Times (X) Higher is BETTER Firms has a higher ability to meet short term obligation If GOOD The firm has a higher ability to meet its short term obligation in the future If POOR The firm may not be able to meet its short term obligation in the future Quick Ratio (QR) or Acid Test Ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 POOR / GOOD Times (X) Higher is BETTER Firm has a higher ability to pay its short term obligation without having rely on illiquid Current Asset If GOOD The firm has a higher ability to pay its short term obligation without having rely on illiquid Current Asset If POOR The firm may not be able to pay its short term obligation without having rely on illiquid Current Asset Net Working Capital (NWC) Current Assets – Current Liabilities POOR / GOOD RM < 0 , represents that the amount of fixed assets are financed with current liabilities If GOOD NWC is POSITIVE represents that the firm’s current assets are financed with long term financing. If POOR NWC is NEGATIVE represents that the firm’s fixed assets are finance with current liabilities
  2. 2. FIN242 – FUNDAMENTAL OF FINANCE CHAPTER 2: RATIOS PREPARED BY: HUSNIZAM HOSIN, UITM JOHOR 2 2. ACTIVITY / ASSET MANAGEMENT RATIOS RATIOS FORMULA WORKINGS INDUSTRY AVERAGE COMMENT SYMBOL EVALUATION Inventory Turnover (ITO) or Inventory Utilization Ratio 𝐶𝑂𝐺𝑆 @ 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 POOR / GOOD Times (X) Higher is BETTER Firms is effectively using its inventory to generate sales If GOOD The firms is effectively using its inventory to generate sales If POOR The firms is ineffectively using its inventory to generate sales and holding excess and unproductive stocks. Average Collection Period (ACP) 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑥 360 POOR / GOOD Days Lower is BETTER Firm is good in managing its credit sales & more cash in hands If GOOD (Shorter) The firm is good in managing its credit sales & more cash in hands If POOR (Longer) The firm is not good in managing its credit sales & less cash in hands Fixed Assets Turnover (FATO) Net Sales Net Fixed Assets POOR / GOOD Times (X) Higher is BETTER Firm is able to utilize its fixed assets and good in managing its assets. If GOOD The firm is able to utilize its fixed assets and good in managing its assets and more revenues generated per Ringgit of the investment. If POOR The firm unable to utilize its fixed assets and not good in managing its assets and less revenue generated per Ringgit of the investment. Total Assets Turnover (TATO) Net Sales Total Assets POOR / GOOD Times (X) Higher is BETTER Firm is able to utilize its overall assets and good in managing its assets If GOOD The firm is able to utilize its overall assets and good in managing its assets. If POOR The firm is unable to utilize its overall assets and not good in managing its assets.
  3. 3. FIN242 – FUNDAMENTAL OF FINANCE CHAPTER 2: RATIOS PREPARED BY: HUSNIZAM HOSIN, UITM JOHOR 3 3. LEVERAGE / DEBT RATIOS RATIOS FORMULA WORKINGS INDUSTRY AVERAGE COMMENT SYMBOL EVALUATION Debt Ratio (DR) Long Term Debt Total Assets x 100 POOR / GOOD % Lower is BETTER Firms is good in managing its debt & low financial risk If GOOD (Lower) The firm is good in managing its debt & low financial risk. If POOR (Higher) The firms is not good in managing its debt & indicates higher financial risk Debt to Equity Ratio (DER) 𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑖𝑒𝑠 POOR / GOOD Times (X) < 1, represents that more funds provided by owners If MORE THAN 1 It indicates that the creditor provided more funds compared to owners. If LESS THAN 1 It indicates that more funds provided by owners compared to creditors. Times Interest Earned (TIE) EBIT Interest POOR / GOOD Times (X) Higher is BETTER Firm is good in meeting their interest payment obligation If GOOD The firm is good in meeting their interest payments obligation and higher capability and lower risks of default. If POOR The firm is not good in meeting their interest payments obligation and lower capability and higher risks of default.
  4. 4. FIN242 – FUNDAMENTAL OF FINANCE CHAPTER 2: RATIOS PREPARED BY: HUSNIZAM HOSIN, UITM JOHOR 4 4. PROFITABILITY RATIOS RATIOS FORMULA WORKINGS INDUSTRY AVERAGE COMMENT SYMBOL EVALUATION Gross Profit Margin (GPM) Gross Profit Net Sales x 100 POOR / GOOD % Higher is BETTER Firm is able to control COGS relative to its sales revenue If GOOD The firm is able to control COGS relative to its sales revenue. If POOR The firm unable to control COGS relative to its sales revenue. Operating Profit Margin (OPM) 𝐸𝐵𝐼𝑇 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 𝑥 100 POOR / GOOD % Higher is BETTER Firm is able to provide more return because the firm is productively managing its assets. If GOOD (Shorter) The firm is able to provide more return because the firm is productively manage its assets If POOR (Longer) The firm unable to provide more return because the firm is unproductively manage its assets Net Profit Margin (NPM) Earning After Taxes Net Sales x 100 POOR / GOOD % Higher is BETTER Firm has a better growth prospect & able to generate net earnings to shareholders (earn more ringgit). If GOOD The firm has a better growth prospect & able to generate net earnings to shareholders (earn more ringgit) If POOR The firm don’t have a better growth prospect & unable to generate net earnings to shareholders.
  5. 5. FIN242 – FUNDAMENTAL OF FINANCE CHAPTER 2: RATIOS PREPARED BY: HUSNIZAM HOSIN, UITM JOHOR 5 Return On Assets (ROA) Earnings After Taxes Total Assets 𝑥 100 POOR / GOOD % Higher is BETTER Firm is able to control costs in its operation (assets are productive) and provide more return. If GOOD The firm is able to control costs in its operation (assets are productive) and provide more return. If POOR The firm is unable to control costs in its operation (assets are productive) and didn’t provide more return. Return On Equity (ROE) Earnings After Taxes Total Equity x 100 POOR / GOOD % Higher is BETTER Firm is able to maximize the owner’s wealth If GOOD The firm is able to maximize the owner’s wealth and give higher return for the owners of the firm. If POOR The firm is unable to maximize the owner’s wealth and didn’t give higher return for the owners of the firm.
  6. 6. FIN242 – FUNDAMENTAL OF FINANCE CHAPTER 2: RATIOS PREPARED BY: HUSNIZAM HOSIN, UITM JOHOR 6 5. MARKET RATIOS RATIOS FORMULA WORKINGS INDUSTRY AVERAGE COMMENT SYMBOL EVALUATION Earnings per Share (EPS) Net Income − 𝑃𝑆 𝐷𝑖𝑣 No. of Shares POOR / GOOD RM Higher is BETTER Firms is profitable enough to pay out more money to its shareholders. If GOOD The firm is profitable enough to pay out more money to its shareholders. If POOR The firm is unprofitable enough to pay out more money to its shareholders. Dividend per Share (DPS) Total Dividend No. of Shares POOR / GOOD RM Higher is BETTER Shows the great way for a company to signal strong performance and great portion of company’s earnings to its shareholders. If GOOD The firm is able to give signal strong performance and great portion of the company’s earnings that is paid out to each shareholders If POOR The firm unable to give signal strong performance and lower portion of the company’s earnings that is paid to each shareholders. Dividend Payout Ratio (DPR) Dividend per Share (DPS) Earnings per Share (EPS) x 100 Dividend paid Net Income x 100 POOR / GOOD % Higher is BETTER How much money a company is returning to shareholders versus how much it is keeping on hand to reinvest in growth, pay off debt, or add to cash reserves (retained earnings).
  7. 7. FIN242 – FUNDAMENTAL OF FINANCE CHAPTER 2: RATIOS PREPARED BY: HUSNIZAM HOSIN, UITM JOHOR 7 If GOOD The firm is able to pay out all their earnings to shareholders as dividend, while only small pay out portion is retained by the business. If POOR The firm is unable to pay out all their earnings to shareholders as dividend, but portion remaining retained by the business. Dividend Yield (DY) Dividend per Share (DPS) Market Price per Share (MPS) 𝑥 100 POOR / GOOD % Higher is BETTER Measures the quantum of cash dividends paid out to shareholders relative to the market value per share If GOOD The firm is able to pays a substantial share of its profits in the form of dividends. If POOR The firm is unable to pays a substantial share of its profits in the form of dividends.. Price Earnings Ratio (PER) Market Price per Share (MPS) Earnings per Share (EPS) POOR / GOOD times Higher is BETTER Firm is able to maximize the owner’s wealth If GOOD The investors are anticipating higher growth in the future. If POOR The investors are not anticipating higher growth in the future.
  8. 8. FIN242 – FUNDAMENTAL OF FINANCE CHAPTER 2: RATIOS PREPARED BY: HUSNIZAM HOSIN, UITM JOHOR 8 ITEMS IN CURRENT ASSETS ITEMS IN FIXED ASSETS ITEMS IN CURRENT LIABILITIES ITEMS IN LONG TERM LIABILITIES ITEMS IN EQUITIES 1. Cash 2. Cheque or Bank Draft or other Negotiable Instruments 3. Deposits 4. Marketable Securities 5. Account Receivable 6. Inventories 7. Prepaid Expenses 8. Prepayment 1. Land 2. Building 3. Motor vehicles 4. Equipment 5. Plant 6. Pattern 7. Goodwill 1. Account payable 2. Tax payable 3. Tax accrual 4. Accrued Expenses 5. Short Term Debt 6. Accounts Liabilities 7. Notes payable 8. Short term borrowing 1. Long term debt 2. Mortgage 3. Bonds 4. Leases 5. Debentures 1. Retained Earnings 2. Paid in capital 3. Common shares 4. Preferred Shares 5. Shareholders’ Equity

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