AnalyzingProductsRatios.docVIP

Ratio Analysis - Chapter 8 Company Analysis - must examine particular situation of company - financial, management competitive situation - Income Statement - sales, prices, new products, profitability, competition, business cycle, dividend record - Operating costs - efficiency, capacity utilization - Balance Sheet - leverage, capital structure - leveraged - if have debt/prefs in capital structure - see Table 8 -2, p. 8 -19 - Warning signs - Notes to Financial Statements Why do Ratio Analysis? - more detailed analysis of particular aspects of business - compare performance of company - to company trends - performance over time - to other companies in the same industry - to accepted rules of thumb (ROT) - benchmarks - identify company strengths weaknesses - signal of problems 4 Major Categories of Ratios 1) Liquidity - ability to meet short term obligations 2) Risk - ability to meet debt obligations - answer 3 questions - is debt level reasonable - can pay interest expense - can repay principal 3) Operating Performance - how well is company using resources - profitability efficiency 4) Valuation - worth of shares Trend analysis - to easily identify assess changes process 1) start with raw data 2) year 1 raw data = 100% 3) year 2 = (year 2 raw data/year 1 raw data) *100% 4) year 3 = (year 3 raw data/year 1 raw data) * 100% 5) etc --- always use year 1 raw data as denominator examples Exhibit 8.2, p. 8 – 22 Exhibit 8.3, p. 8 -- 23  Ratio Analysis - 2 Key Financial Ratios RATIO DEFINITION Rule of Thumb (ROT) LIQUIDITY 1) Current Ratio Current Assets/Current Liabilities 2:1 2) Quick Ratio (Current Assets - Inventory)/Current Liabilities 1:1 3) Operating Cash Flow Cash Flow from Operations/Current Liabilities 1:1 RISK ANALYSIS 4) % of Total Capital (ST LT Debt)/ Invested Capital 60% for utilities 5) Debt/Equity (ST LT Debt)/Shareholders Equity 50% for indu