profitability ratios
DESCRIPTION
$200,000 $4,000,000. Net income sales. Net income Total assets. $200,000 $1,600,000. Net income Sales. Sales Total assets. Net income Stockholders’ equity. $200,000 $1,000,000. Return on assets (investment) (1 – Debt/Assets). 0.125 1 – 0.375. 0.10 1 – 0.33. T 3-3. - PowerPoint PPT PresentationTRANSCRIPT
th9
©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
N I N
T H
Irwin/McGraw-Hill
BlockHirt
th9
©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
N I N
T H
Irwin/McGraw-Hill
BlockHirt
Saxton Company Industry Average
1. Profit margin = = 5% 6.7%
2. Return on assets (investment) =
a. = 12.5% 10%
b. 5% 2.5 = 12.5% 6.7% 1.5 = 10%
3. Return on equity =
a. = 20% 15%
b. = 20% = 15%
Net incomesales
$200,000$4,000,000
Net incomeTotal assets
Net incomeSales
SalesTotal assets
$200,000$1,600,000
Net incomeStockholders’ equity
$200,000$1,000,000
Return on assets (investment)(1 – Debt/Assets)
0.1251 – 0.375
0.101 – 0.33
T 3-3
Profitability Ratios
th9
©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
N I N
T H
Irwin/McGraw-Hill
BlockHirt
Saxton Company Industry Average
4. Receivables turnover =
= 11.4 10 times
5. Average collection period =
= 32 36 days
6. Inventory turnover =
= 10.8 7 times
Sales (credit)Receivables
$4,000,000$350,000
Accounts receivableAverage daily credit sales
$350,000$11,111
SalesInventory
$4,000,000$370,000
T 3-6
Asset Utilization Ratios
th9
©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
N I N
T H
Irwin/McGraw-Hill
BlockHirt
Asset Utilization RatiosSaxton Company Industry
Average
7. Fixed asset turnover =
= 5 5.4 times
8. Total asset turnover =
= 2.5 1.5 times
SalesFixed assets
$4,000,000$800,000
SalesTotal assets
$4,000,000$1,600,000
T 3-6
th9
©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
N I N
T H
Irwin/McGraw-Hill
BlockHirt
Liquidity RatiosSaxton Company Industry
Average
9. Current ratio =
= 2.67 2.1
10. Quick ratio =
= 1.43 1.0
Current assetsCurrent liabilities
$800,000$300,000
Current assets – InventoryCurrent liabilities
$430,000$300,000
T 3-7
th9
©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
N I N
T H
Irwin/McGraw-Hill
BlockHirt
Debt Utilization RatiosSaxton Company Industry
Average
11. Debt to total asets =
= 37.5% 33%
12. Times interest earned =
= 11 7 times
13. Fixed charge coverage =
= 6 5.5 times
Total debtTotal assets
$600,000$1,600,000
Income before interest and taxes
Interest$550,000$50,000
Income before fixed charges and taxes
Fixed charges$600,000$100,000
T 3-8
th9
©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
N I N
T H
Irwin/McGraw-Hill
BlockHirt
Saxton IndustryCompany Average Conclusion
A. Profitability1. Profit Margin ……………… 5.0% 6.7% Below average2. Return on Assets ………….. 12.5% 10.0% Above average due
to high turnover3. Return on Equity ………….. 20.0% 15.0% Good due to
ratios 2 and 10B. Asset Utilization
4. Receivables turnover ……. 11.4 10.0 Good5. Average collection period…. 32.0 36.0 Good6. Inventory turnover ………... 10.8 7.0 Good7. Fixed asset turnover ………. 5.0 5.4 Below average8. Total asset turnover ………. 2.5 1.5 Good
C. Liquidity9. Current ratio ……………… 2.67 2.1 Good
10. Quick Ratio ……………….. 1.43 1.0 GoodD. Debt Utilization
11. Debt to total assets ……….. 37.5% 33.0% Slightly more debt12. Times interest earned ……. 11.0 7.0 Good13. Fixed charge coverage …... 6.0 5.5 Good
T 3-9
Table 3-3--Ratio Analysis