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To assess a firms financial condition and p performance It is of interest to shareholders, creditors, regulators and the firms own management Ratios can standardize F/S information and make it possible to compare companies of varying sizes

Ratios

Practice Problems

Anyone can crunch the numbers and generate the ratiosthe real skill is putting life into the p g numbers Establish the perspective / purpose of your analysis Benchmarks
Industry Internal past Internal forecast

Ratios

Practice Problems

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Ratios must be considered together: a single ratio y practically meaningless y g by itself is p Compare apples vs. apples: use F/S of companies that cover the same time period Use audited F/S whenever possible Garbage in, garbage out: the financial data being compared should have been developed in the same way

Ratios

Practice Problems

Be wary of inflation distortions Cost vs. benefit tradeoff: vs

A core set of 20 to 25 ratios will usually provide you with just about the same important information that 100 ratios will give you

Ratios

Practice Problems

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Balance Sheet Quality

Charging off assets Hidden liabilities Hidden assets Off balance sheet financing

Ratios

Practice Problems

Earnings Quality
Time of revenue recognition Establishment of reserves Amortization of intangible assets Including all losses and debt Pro forma profitability measures

Ratios

Practice Problems

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Problems Caused by Inflation

Inventory profit as a result of timing of price increases Inventory profit Choice of inventory valuation methods
LIFO FIFO

Rising interest rates causing a decline in the value of longterm debt Differences in the reporting of earnings Recognition of sales

Ratios

Practice Problems

Operating Profit Margin = ROA = Operating Income Ave. Total Assets

Operating Income Sales

Net Profit Margin =

ROE = Net Income Ave. SHE

Net Income Sales

EPS =

Net Income Wtd. Ave. C/S Outstanding

Practice Problems
8

Ratios

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Inventory Turnover =
Days Inventory = A/R Turnover =

Cost of Goods Sold Ave. Inventories A I t i

360 days Inventory Turnover

Credit Sales Average A/R

Ave. Collection Period =

360 days A/R Turnover

Ratios

Practice Problems

A/P Turnover =

Cost of Goods Sold Ave. Ave A/P

Ave. Payment Period =

GP Margin =

360 days A/P Turnover

Gross Profit Sales

Marketing & Admin Exp Sales

Operating Cost Ratio =

Ratios

Practice Problems

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Fixed Asset Turnover =

Equity Turnover =

Sales Ave. Fixed Assets A Fi d A t

Net Sales Ave. Equity

Total Asset Turnover =

Sales Ave. Total Assets

Ratios

Practice Problems

11

Interest Coverage =

EBIT Interest Expense

Cash Flow Coverage =

Debt Equity Ratio =

CFO + Debt Interest + Lease Interest Debt Interest + Lease Interest

Total Liabilities Total Equity

Debt Asset Ratio =

Total Liabilities Total Assets

Ratios

Practice Problems

12

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Current Ratio =

Current Assets Current Liabilities

Quick Ratio =

Cash + Marketable Securities + A/R Current Liabilities

Cash Flow to LTD =

CFO BV of LTD + PV of Operating Lease

Cash Flow to Total Interest-Bearing Debt = CFO Total LTD + Current Interest-Bearing Liabilities
Ratios Practice Problems
13

Net Incomet Net Incomet 1 Net Incomet 1 N I DOL = Salest Salest 1 Salest 1

Ratios

Practice Problems

14

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P/E Ratio =

Stock Market Price EPS

Market Book Ratio =

Market Value of Equity Book Value of Equity

Tobin's Q =

MV Equity + MV Debt Replacement Cost of All Assets

Dividend per Share Market Price per Share Dividends Per Share EPS
Practice Problems

Dividend Yield =

TobinsQ isnamed aftertheeconomist JamesTobin.Theratio J T bi Th ti isusefulforpredicting futureinvestment activity:firmsand industrieswithaq ratio>1havean incentivetoinvestsince themarkets assessment of the ROI assessmentoftheROI isgreaterthanthecost oftheinvestment.

Dividend Payout =
Ratios

15

Cash Flow per Share =

Price / CF =

Operating CF WAVE C/S Outstanding

Stock Market Price Cash Flow per Share

Market Cap = Market Price per Share x Outstanding C/S

CompoundAnnualGrowthRate(CAGR)

xn = ( x0 )(1 + g )
Ratios Practice Problems

x g = n 1 x0
16

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ROE =

Net income Equity

Net income Sales Profitability/ Cost Control

Sales Assets

Assets Equity Leverage

Efficiency

ROE =

Net income = Equity

Net income EBT Tax Retention Rate

EBT EBIT Interest Burden

EBIT Sales

Sales Assets

Assets Equity Leverage

Operating Efficiency Profit Margin

Ratios

Practice Problems

17

Common size Balance Sheet:

All items as a % of Total Assets Total Assets = 100%

Common size Income Statement

All items as a % of Total Revenues Total Revenues = 100%

Ratios

Practice Problems

18

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19

Trend Analysis
Use a base year Year to year changes

Ratios

Practice Problems

20

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Trend analysis XYZ current ratio Cross-sectional analysis XYZ current ratio Industry norms Both simultaneously XYZ current ratio Industry norms

20X0 1.9

X1 2.2

X2 2.3 20X2 2.3 2.5

20X0 1.9 2.5

X1 2.2 2.4

X2 2.3 2.5

Ratios

Practice Problems

21

Leverage Ratios
For Qualifying Capital, refer to BSP Circular 538 - Risk Based Capital BSP Adequacy Framework for the Philippine Banking System

CAR=

Tier 1 Capital + Tier 2 Capital Risk Weighted

Proxy for CAR =

Equity Total Assets Equity Customer Loan Receivables

Equity to Loans Ratio =

Ratios

Practice Problems

22

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Liquidity Ratios

QLAR =

Quasi-Liquid Assets Total Assets

Customer Loan Receivables Total Deposit Liabilities

Loans to Deposit =

Ratios

Practice Problems

23

Quasi-Liquid Assets
Cash and other cash items Due from BSP Due from other banks Interbank loans receivable and securities purchased under agreements to resell Trading securities (i.e. FVTPL) Investment securities : Available-for-Sale (AFS) Investment securities : Held-to-Maturity (HTM)

Ratios

Practice Problems

24

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Coverage Ratios Coverage Ratio =

NPL Ratio =

Allowance for Doubtful Accounts Non-Performing Loans, gross

Non-Performing Loans, gross Total Loans, gross

Non-Performing Loans Non Performing Loans, gross Fair Value of Collateral

Ratios

Practice Problems

25

Coverage Ratios
Rate of Restructured Loans = Problematic Loan Ratio = Restructured Loans Total Loans, gross

NPL + Restructured Loans Total Loans, gross NPL + Restructured Loans + ROPOA Total Loans, gross

Non-Performing Asset Ratio =

Ratios

Practice Problems

26

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Profitability Ratios
Net Interest Margin = Net Interest Income Earning Assets

Cost to Income Ratio = Cost Margin =

ROTA =

Operating Expenses Net Interest Income + Other Income

Operating Expenses Ave. Total Assets

NI + ( Interest Expense )(1 tax rate ) Ave. Total Assets

ROTE =
Ratios

Net Income Ave. SHE

Practice Problems
27

Earning Assets
Due from BSP Due from other banks Interbank loans receivables and securities purchased under agreements to resell Trading securities (i.e. FVTPL) Investment securities : Available-for-Sale (AFS) Loan Receivables and Advances

Note: Cash, in itself, is NOT an earning asset

Ratios

Practice Problems

28

14