Ratios

Current Assets/ Current Liabilities
Problems:
The assumption that current assets can always be converted to cash is not always true.
Easy to manipulate
Behaves as if firms are liquid and not ongoing

Cash+Marketable Securities/ Current Liab.
Fixes the issues in the current ratio.

Current Assets-Current Liabilities or:
(LTD+indeterminate debt+ equity) - fixed and other assets
If positive it means LTD is financing CA
The higher the number the more conservative the firm is
LTD>CA, LTD is financing CA, so Conservative

may exist or may not
1. Defferred tax liability: Can be liab. and assets
2. Unfunded Pension Liability: occurs when pension liab.>pension assets
3. Minority interest claims(minority shareholder): Do not have any say to firm unless, they go bankrupt, potentially leading to a large liab.

Trade Rec./ WC

Inventory/ WC

Net sales/ working capital
measure of how hard we are working our working capital.
The standard or averages will vary among industries

Credit Sales / Accounts Rec.
Higher the ratio the more acceptable
Efficiency in which firm is collecting receivables
Potential for bad debt write-off

Accounts receivable / (credit sales/360)
# of days sales that are uncollected
Firm wants ratio LOW
# of days sales that are tied up in AR

Receivables each month / Total Receivables in that month

Cost of goods sold / Average Inventory
You want ratio high(bc sign of high Rev)
How well or fast the firm is selling inventory
MAIN Problem
The Inv. valuation technique that is used to value the inventory (cannot compare LIFO and FIFO)

Sales / Average net fixed assets
You want a HIGHER ratio, but be careful b/c if ratio is too high you may have too many FA that have no use

Sales / Average Total Assets
weighted average of other turnover ratios
HIGHER is better

Total Debt / Total Assets
if = 1 the firm should be concerned bc there would not be any equity
Problems:
1. Always a different principle on debt and PMT.
2. A schedule not PMT will decrease
3. Assets are assumed and not depreciated and ratio with the ongoing firm will reflect an increase.

Total Debt / Total Equity
Problem: Must define debt and equity the same way

EBIT / Interest
HIGHER is better
how will earnings before income cover interest
Coverage Ratio

EBIT / All fixed charges <--- before tax
Int+lease PMT+ (Sinking fund PMT+pref. dividends/1-tax) <-- After tax
Coverage Ratio

Fixed Assets / owners equity
A firm trades on equity
(determines if firm is growing too fast)
If firm has too much net worth tied up in FA:
the firm will have too little WC
the firm will over-utilize debt
profitability will suffer

Equity-Assets-Sales-Costs-Profit-RE

Net Sales / Owners Equity
(determines if firm is growing too fast)
Determines if firm is an overtrader or undertrader
Undertrader: You need to put $ or Equity in firm product & there is no demand for it
Overtrader: Focus on revenue, always willing to trade, must have perfect internal or external environment to survive.

Net Income / Net Sales
A low profit margin indicates a low margin of safety: higher risk

Net Income / Total Assets

Net Income / Owners equity<BR>Total DuPont System
PM*TAT*EM
(NI/Sales)*(Sales/Assets)*(Assets/Equity)
It measures a firm's efficiency at generating profits from every unit of shareholders' equity<BR>ROE shows how well a company uses investment funds to generate earnings growth.

After tax operating Income - (the cost of capital * capital)
An estimate of economic profit
managers who us EVA focus on:
1. increase income without using capital
2. Use less Capital
3. Invest Capital in high return projects
EVA emphasizes that value depends on three things:
1. The rate of return on the capital invested
2. The required rate of return or the opportunity cost on capital invested.
3. The amount of capital invested(lower capital is better)