COB 242 1st Edition Lecture 2Outline of Current Lecture 1. Financial Statement Analysis (continued)a. Debt Managementi. Times interest earned ratioii. Debt-to-equity ratioiii. Equity multiplierb. Profitabilityi. Gross margin percentageii. Net profit margin percentageiii. Return on total assetsiv. Return on equityc. Financial LeverageCurrent Lecture1. Financial Statement Analysis (continued)a. Debt Management- banks look to see how well debt is managedi. Times interest earned ratio- measures a company’s ability to provide protection for its long-term creditors 1. Earnings before interest expense and income taxes (EBIT) / interest expense = times interest earned ratio2. Ratio < 1 is inadequate ii. Debt-to-equity ratio- indicates the relative proportions of debt to equity on a company’s balance sheet1. Total liabilities / stockholders’ equity = debt to equity ratio2. Creditors like less debt and more equity iii. Equity multiplier- indicates the portion of a company’s assets that are funded by equity1. Average total assets / average stockholders’ equity = equity multiplier2. Average total assets = (beginning total assets balance + ending total assets balance)/23. Average stockholders’ equity= (beginning stockholder’s equity balance + ending stockholder’s equity balance)/2b. ProfitabilityThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.i. Gross margin percentage- indicates how much of each sales dollar is left after deducting the cost of goods sold to cover expenses and provide a profit1. Gross margin / sales = gross margin percentage2. Gross margin = sales – cost of goods soldii. Net profit margin percentage- 1. Net income / salesiii. Return on total assets- investors commonly look at this1. (Net income + (interest expense x (1 – tax rate))) / average total assets = return on total assets 2. Average total assets = (beginning total assets balance + ending total assets balance)/2iv. Return on equity- indicates how well the company used the owners’ investments to earn income1. Net income / average stockholders’ equity = return on equity2. Average stockholders’ equity = (beginning stockholder’s equity balance + ending stockholder’s equity balance)/2c. Financial leveragei. Positive financial leverage 1. Return on investments in assets is greater than fixed rate of returnon borrowed fundsii. Negative financial leverage1. Return on investments in assets is less than fixed rate of returned borrowed