Financial Statement Analysis

Ratio Analysis Example

*Create common size balance sheet and common size income statement.

*Calculate ratios for Prufrock Corporation

Short-term solvency or liquidity ratios

Liquidity ratio measures the firm’s ability to pay its bills over the short run without undue stress.

Current ratio=

*Do we have enough short-term liquid assets to cover our short-term debts?

Quick ratio (acid test ratio) =

*Do we have enough really liquid short-term assets to cover our short-term debts?

Long-term solvency, or financial leverage, ratios

Leverage ratio measures the form’s long-run ability to meet its obligations.

Total debt ratio=

What percentage of total assets is financed with either short- or long-term debt?

Debt-equity ratio=

Times interest earned=

* It measures how well a company has its interest obligations covered. Are we generating enough income to make out interest payments?

Asset management or turnover ratios

Turnover ratios measure asset use efficiency.

Inventory turnover=

*On average, how many times per year do we go through our inventory? (Excess inventory is expensive!)

Day’s sales Outstanding=

Fixed Assets Turnover Ratio=

Total Assets Turnover Ratio=

Profitability ratios

Operating margin=

Profit margin=

Return on assets (ROA) =

*What is profit per dollar of asset?

Return on equity (ROE) =

*What is the rate of return for stockholders?

Return on equity (ROE) = Profit margin * Total asset turnover * Equity multiplier

Market value ratios

(We assume that Prufrock has 33 million shares outstanding and stock sold for \$88 per share at the end of the year.)

EPS=

Price-earnings ratio=

Market-to-book ratio=

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