Sample Financial Ratios

Sample Balance Sheet

All numbers in thousands.

Cash $6,489
A/R $1,052,606
Inventory $295,255
Other CA $199,375
Total CA $1,553,725
Net FA $2,535,072
Total Assets $4,088,797
   
A/P $340,220
N/P $86,631
Other CL $1,098,602
Total CL $1,525,453
LT Debt $871,851
C/S $1,691,493
Total Liab. & Equity $4,088,797

Sample Income Statement

Numbers in thousands, except EPS & DPS

Revenues$3,991,997
Cost of Goods Sold$1,738,125
Expenses$1,269,479
Depreciation$308,355
EBIT$739,987
Interest Expenses$42,013
Taxable Income$697,974
Taxes$272,210
Net Income$425,764
EPS2.17
Dividends per share0.86

Liquidity Ratios

Current Ratio = CA/CL
$1,553,725/$1,525,453=1.02 time

Quick Ratio = (CA-Inventory)/CL
($1,553,725-$295,225)/$1,525,453=.825 times

Cash Ratio = Cash/CL
$6,489/$1,525,453 = .004 times

Leverage Ratios

Total Debt Ratio = (TA-TE) / TA
($4,088,797-$1,691,493) / $4,088,797 = .5863 times or 58.63%
The firm finances  almost 59%of their assets with debt.

Debt/Equity = TD/TE
$4,088,797-$1,691,493)/$1,691,493=1.417 times

Equity Multiplier = TA/TE = 1 + D/E
1 + 1.417 = 2.417

Coverage Ratios

Times Interest Earned = EBIT / Interest
$739,987 / $42,013 = 17.6 times

Cash Coverage = (EBIT + Depreciation) / Interest
($739,987+$308,355)/$42,013=24.95 times

Inventory Ratios

Inventory Turnover = Cost of Goods Sold / Inventory
$1,738,125 / $295,255 = 5.89 times

Days’ Sales Inventory = 365 / Inventory Turnover
365/5.89 = 62 days

Receivables Ratios

Receivables Turnover = Sales / Accounts Receivable
$3,991,997 / $1,052,606 = 3.79 times

Day’s Sales in Receivables = 365 / Receivables Turnover
365/3.79 = 96 days

Total Asset Turnover

Total Asset Turnover = Sales / Total Assets
$3,991,997 / $4,008,797 = .98 times

Measure of assets use efficiency

Not unusual for TAT < 1, especially if a firm has a large amount of fixed assets.

Profitability Measures

Profit Margin = Net Income / Sales
$425,764/$3,991,997 = . 1067 times or 10.67%

Return on Assets (ROA) =Net Income/Total Assets
$425,764/$4,088,797 = .1041 times or 10.41%

Return on Equity (ROE) = Net Income / Total Equity
$425,764 / $1,691,493 = .2517 times or 25.17%

Return on Investment (ROE) = PM * TAT * EM

Profit margin is a measure of the firm’s operating efficiency – how well does it control costs.

Total asset turnover is a measure of the firm’s asset use efficiency – how well does it manage assets.

Equity multiplier (Total Assets  / Total Equity ) is a measure of the firm’s financial leverage. 

ROE is affected by: Operating efficiency (Profit), asset use efficiency (TAT), and financial leverage ( Equity Multiplier)

Market Values Measures

Market Price = $61,625 per share

Shares Outstanding = 205,838,594

PE Ratio = Price per Share / Earnings per Share
$61.625/2.17 = 28.4 times

Market-to-book ratio = Market value per share / book value per share
$61.625 / ($1,691,493,000/$205,838.594)=7.5 times

Payout and Retention Ratios

Dividend Payout Ratio = Cash Dividends / Net Income
0.86/2.17 = .3963 or 39.63%

Retention Ratio = Additions to retained earnings / Net Income = 1-Payout ratio
1.31/2.17 = .6037 or 60.37%
Or 1-.3963 = .6037 = 60.37%

Internal Growth Rate

The internal growth rate tells us how much the firm can grow assets using retained earnings as the only source of financing. (b=retention ratio)

Internal Growth Rate
ROA * b / 1- ROA * b

or 

.1041 * .6037 / 1- .1041 * 6037 = .0671 = 6.71%

The Sustainable Growth Rate

The sustainable growth rate tells us how much the firm can grow by using internally generated funds and issuing debt to maintain a constant debt ratio. (b=retention ratio)

Sustainable Growth Rate:

ROE * b / 1-ROE * b

= .2517 * .6037 / 1-.2517 * .6037 = .1792

= 17.92%

Determinants of Growth 

Profit margin – operating efficiency

Total asset turnover – asset use efficiency

Financial leverage – choice of optimal debt ratio

Dividend policy – choice of how  much to pay to shareholders versus reinvesting in the firm.