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Financial Primer

In: Business and Management

Submitted By umergul
Words 450
Pages 2
Financial Ratios Primer
Management Cases and Problem-Solving Process Spring 2012

Financial ratios can provide insight into the profitability, liquidity & coverage and efficiency of a company (1 of 3)
Profitability
Gross Profit Margin =
Gross Profit Net Sales Operating Profit Net Sales Net Income Net Sales Net Income Average Total Assets Net Income Average Common Equity Net Income Outstanding Common Shares Impact of operating (both raw materials, and SG&A) on the finances of the company – management has more control over SG&A than raw material prices Used primarily for internal comparison since different firms spend differently on expenditures and financing Impact of raw material costs on the finances of a company

Operating Profit Margin

=

Net Profit Margin

=

Return on Assets (ROA)

=

Relies on the capital intensity of the company – best used for historical comparison than company comparisons

Return on Equity (ROE)

=

Used to compare the profitability of a firm compared to other firms in the same industry

Earnings per share (EPS)

=

A ratio that is a major input for stock price valuation

Financial ratios can provide insight into the profitability, liquidity & coverage and efficiency of a company (2 of 3)
Liquidity & Coverage
Current Ratio =
Current Assets Current Liabilities Cash + Marketable Securities + Net Receivables Current Liabilities Debt Service Coverage Ratio = EBITDA Interest Expense + Year Debt Principle = Total Debt Shareholder Equity EBIT Interest Expense Calculates the ease of which a firm can pay interest on outstanding debt. Less than 1 would mean that the company would not be able to cover interest expenses Current ratio identifies how able a company is able to pay it’s short term obligations. One must take into consideration how quickly a firm can turn current assets into cash Calculates the firm’s...

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