RATIO ANALYSIS
   Ratio Defined:
      Simply one number divided by another.
    Why Calculate Ratios?
      Make data more meaningful.
    High - Low - Avg: How do you  judge?
      Industry Averages:
       
        Dun & Bradstreet
        Robert Morris Associates
        Trade Associations
        Ratio Analysis (Continued)
      Prior Period Ratios:
       
        Calculated from the firm’s previous financial 
        statements (e.g., trend analysis)
      Current Goals:
        Often, goals are stated in the form of ratios.
      Benchmarking:
        A group of “selected” companies (e.g., form 
        your own industry).
       Common Size Ratios
  Common Size Balance Sheet
    Each item is stated as a % of total 
    assets.
   Common Size Income Statement
    Each item is stated as a % of sales.
                 Liquidity Ratios
     Liquidity Ratios:
        Ability to meet short-term 
        obligations
     Current Ratio  =    Current Assets
                       Current Liabilities
     Quick Ratio  =  Current Assets  -  Inventory
                          Current Liabilities
              Asset Utilization Ratios
    Effective use of assets in the 
    process of generating sales.
 Receivables Ratios
     Note: Ideally, credit sales should be 
      used for the receivables ratios. 
      However, only total sales are available 
      at times.
      Accounts Receivable Turnover  =          Sales
                                       Accounts Receivable
      Average Collection Period  =   Accounts Receivable
                                        Sales 360
     AKA: Days Sales Outstanding
                                                  =   360 (Acct. Rec. Turnover)