Chapter 3 - Evaluating A Firm's Financial Performance: 2005, Pearson Prentice Hall
Chapter 3 - Evaluating A Firm's Financial Performance: 2005, Pearson Prentice Hall
Chapter 3 - Evaluating A Firm's Financial Performance: 2005, Pearson Prentice Hall
Liquidity
Efficient use of Assets
Leverage (financing)
Profitability
We will want to answer
questions about the firm’s
Liquidity
Efficient use of Assets
Leverage (financing)
Profitability
Financial Ratios
current assets
current liabilities
What is CyberDragon’s Current
Ratio?
50,190
25,523 = 1.97
What is CyberDragon’s Current
Ratio?
50,190
25,523 = 1.97
accounts receivable
daily credit sales
What is the firm’s Average Collection
Period?
operating income
total assets
What is the firm’s Operating Income
Return on Investment (OIROI)?
11,520 = 14.07%
81,890
What is the firm’s Operating Income
Return on Investment (OIROI)?
11,520 = 14.07%
81,890
•Slightly below the industry
average of 15%.
What is the firm’s Operating Income
Return on Investment (OIROI)?
11,520 = 14.07%
81,890
•Slightly below the industry
average of 15%.
•The OIROI reflects product
pricing and the firm’s ability to
keep costs down.
What is their Operating Profit
Margin?
What is their Operating Profit
Margin?
operating income
sales
What is their Operating Profit
Margin?
11,520 = 10.22%
112,760
What is their Operating Profit
Margin?
11,520 = 10.22%
112,760
sales
total assets
What is their Total Asset Turnover?
credit sales
accounts receivable
What is the firm’s Accounts
Receivable Turnover?
85,300
27,530 = 3.10 times
What is the firm’s Inventory
Turnover?
85,300
27,530 = 3.10 times
sales
fixed assets
What is the firm’s Fixed Asset
Turnover?
112,760
31,700 = 3.56 times
What is the firm’s Fixed Asset
Turnover?
112,760
31,700 = 3.56 times
ROE =
15,000
ROE = = 15%
100,000
How does Leverage work?
Suppose the same $100,000 firm is
financed with half equity, and half 8%
debt (bonds). Earnings are still $15,000.
ROE =
How does Leverage work?
Suppose the same $100,000 firm is
financed with half equity, and half 8%
debt (bonds). Earnings are still $15,000.
total debt
total assets
What is CyberDragon’s Debt Ratio?
47,523 = 58%
81,890
What is CyberDragon’s Debt
Ratio?
47,523 = 58%
81,890
If the industry average is 47%, what
does this tell us?
What is CyberDragon’s Debt Ratio?
47,523 = 58%
81,890
If the industry average is 47%, what
does this tell us?
operating income
interest expense
What is the firm’s Times Interest
Earned Ratio?
11,520
3,160 = 3.65 times
What is the firm’s Times Interest
Earned Ratio?
11,520
3,160 = 3.65 times
net income
common equity
What is CyberDragon’s
Return on Equity (ROE)?
5,016
34,367 = 14.6%
What is CyberDragon’s
Return on Equity (ROE)?
5,016
34,367 = 14.6%
5,016
34,367 = 14.6%
Brings together:
Profitability
Efficiency
Leverage
The DuPont Model
Net Profit Total Asset Debt
ROE =
Margin
x Turnover
/ (1- Ratio
)
The DuPont Model
Net Profit Total Asset Debt
ROE =
Margin
x Turnover
/ (1- Ratio
)