Financial Analysis
Financial Ratio Analysis
PROFITABILITY
- Ability to sell a product for more than the cost of producing it.
- Not an exact estimate of the company's pricing strategy but give a good indication of financial health.
- Without an adequate gross margin, a company will be unable to pay its operating and other expenses and build for the future.
- Should be stable should not fluctuate much from one period to another, unless the industry it is in has been undergoing drastic changes which will affect the costs of goods sold or pricing policies. - measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc.
- how much a company makes (before interest and taxes) on each dollar of sales.
- to determine the quality of a company, it is best to look at the change in operating margin over time and to compare the company's yearly or quarterly figures to those of its competitors.
- If a company's margin is increasing, it is earning more per dollar of sales. The higher the margin, the better.
WORKING CAPITAL RATIOS
How efficiently the firm is managing its net WC
Account Receivable days = Account Receivable/ Average Daily sales
High AR days:
- Doing poor jobs in collecting
- Boost sales by offering generous credit term
Account Payable days = Account payable / Average daily purchases
Inventory days = Inventory / Avarage daily COGS
LIQUIDITY RATIOS
Current ratio = current assets / current liabilities
Quick ratio = (cash + marketable securities + net receivables) / current liabilities
- the quick ratio is a more conservative standard.
- If the quick ratio is greater than one, there would seem to be no danger that the firm would not be able to meet its current obligations.
- If the quick ratio is less than one, but the current ratio is considerably above one, the status of the firm is more complex. In this case, the valuation of inventories and the
PROFITABILITY
- Ability to sell a product for more than the cost of producing it.
- Not an exact estimate of the company's pricing strategy but give a good indication of financial health.
- Without an adequate gross margin, a company will be unable to pay its operating and other expenses and build for the future.
- Should be stable should not fluctuate much from one period to another, unless the industry it is in has been undergoing drastic changes which will affect the costs of goods sold or pricing policies. - measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc.
- how much a company makes (before interest and taxes) on each dollar of sales.
- to determine the quality of a company, it is best to look at the change in operating margin over time and to compare the company's yearly or quarterly figures to those of its competitors.
- If a company's margin is increasing, it is earning more per dollar of sales. The higher the margin, the better.
WORKING CAPITAL RATIOS
How efficiently the firm is managing its net WC
Account Receivable days = Account Receivable/ Average Daily sales
High AR days:
- Doing poor jobs in collecting
- Boost sales by offering generous credit term
Account Payable days = Account payable / Average daily purchases
Inventory days = Inventory / Avarage daily COGS
LIQUIDITY RATIOS
Current ratio = current assets / current liabilities
Quick ratio = (cash + marketable securities + net receivables) / current liabilities
- the quick ratio is a more conservative standard.
- If the quick ratio is greater than one, there would seem to be no danger that the firm would not be able to meet its current obligations.
- If the quick ratio is less than one, but the current ratio is considerably above one, the status of the firm is more complex. In this case, the valuation of inventories and the