# Ratio analysis

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## Ratio analysis

Lecture number:
12
Pages:
2
Type:
Lecture Note
School:
University of Texas at Austin
Course:
Fin 320f - Foundations of Finance
Edition:
1
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Unformatted text preview:

Lecture 12 Outline of Current Lecture -Ratio analysis -How liquid is firm -Are profits adequate -How are assets financed -Is return on shareholder investment adequate -Is management creating shareholder value Current Lecture  Ratios provide 2 ways to analyze financial performance  Trend analysis: Comparing a firm’s ratios over time  Benchmarking: Comparing the firm’s ratios to those of other firms  Ratio analysis questions  How liquid is the firm?  Current Ratio: the number of times that current assets can pay for current liabilities  = Current Assets ÷ Current Liabilities  = \$240,000 ÷ \$54,000= 4.44 times  Acid Test (Quick Ratio): the number of times current assets—without inventory—can pay for current liabilities  = (Current Assets – Inventory) ÷ Current Liabilities  = (\$240,000 – \$120,000) ÷ \$54,000= 2.22 times  Inventory Turnover: Number of times during the year inventory is sold and replenished  = COGS ÷ Inventory= \$600,000 ÷ \$120,000= 5 times  Receivables Collection Period: Number of days until receivables are collected  = Receivables ÷ Daily credit sales  = Receivables ÷ (Annual credit sales ÷ 360 days)  = \$78,000 ÷ (\$750,000 ÷ 360 days)= 37 days  DSO, aka Average Collection Period: Number of days to collect all forms of payment  = Receivables ÷ Daily TOTAL sales  = Receivables ÷ (Annual TOTAL sales ÷ 360)  = \$78,000 ÷ (\$1,000,000 ÷ 360)= 28 days  DPO, aka Average Payables Period, aka Payables Deferral Period: Number of days until payables are paid  = Accounts payable ÷ Daily purchases  = Accounts payable ÷ (COGS ÷ 360 days)  = \$54,000 ÷ (\$600,000 ÷ 360)= 32 days FIN 320F

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