Professional Documents
Culture Documents
by Raaga
Learning Objectives
After reading this chapter, you should be able to: Explain the purpose and importance of financial analysis. Calculate and use a comprehensive set of measurements to evaluate a companys performance. Describe the limitations of financial ratio analysis.
Financial Ratios
Ratios give us two ways of making meaningful comparisons of a firms financial data:
Trends across time Comparisons with other firms ratios
Current Ratio
Compares cash and current assets that should be converted into cash during the year with the liabilities that should be paid within the year Current assets/Current liabilities
Starbucks Example: Current ratio= $922M / $591M = 1.67
Quick Ratio
Compares cash and current assets (minus inventory) that should be converted into cash during the year with the liabilities that should be paid within the year. Cash and accounts receivable/Current liabilities
Inventory Turnover
How many times is inventory rolled over during the year? Cost of goods sold/Inventory
Starbucks Example Inventory Turnover= $3,207M / $342M = 9.38X
Starbucks 1.67
1.05 68.1 days 5.36X
Peers 2.02
1.54 93 days 3.90X
8.5X
Starbucks 16.3%
Peers 14.9%
10.7%
1.53X
11.8%
1.26X
2.33X
2.75X
Debt Ratio
What percentage of the firms assets are financed by debt? Total debt/Total assets
Starbucks Example Debt ratio = $591M / $2,672M = .221 or 22.1%
Ratio
Debt Ratio Times Interest Earned
Are the earnings available to shareholders attractive Return on equity Net income/Common equity Starbucks Example Return on Equity = $268M / $208M = .129 or 12.9%
Starbucks 12.9%
Peers 12.0%
Price/Earnings Ratio
Measures how much investors are willing to pay for $1 of reported earnings Price per share/Earnings per share
Starbucks Example Price/Earnings Ratio = $35.00 / $0.69 = 51X
Price/Book Ratio
Compares the market value of a share of stock to the book value per share of the reported equity on the balance sheet Price per share/Equity book value per share
Starbucks Example Price/Book Ratio = $35.00 / $5.32= 6.58X