1、Summary The thrust of this chapter is two twofold. First, the use of financial ratios to evaluate the success of a firm is examined. Second, the impact of inflation and disinflation on business operations is assessed and explored.第1頁/共20頁1. Ratio Analysis. A. Uses of ratios. 1. Provide a basis for e

2、valuating the operating performance of a firm. 2. Facilitate comparison with other firms. B. Sources of comparative ratios. 1. Dun & Bradstreet. 2. Robert Morris Associates. 3. Trade organizations. 4. Standard &Poors Industry Surveys. 5. Value Line Investment Survey. 6. Moodys Corporation. 7. Comput

3、er database such as COMPUSTAT.第2頁/共20頁1. Ratio Analysis. C. Classification and computation.1. Profitability: Measures of returns on sales, total assets, and invested capital.a. Profit Margin= Net income/ Salesb. Return on assets (investment)=Net income/ Total Assetsc. Return on Equity=Net income/ St

4、ockholders equity =Return on Assets/ (1-Debt/Assets)第3頁/共20頁1. Ratio Analysis. 2. Asset utilization: Measure of the speed at which the firm is turning over accounts receivable, inventories, and the productivity of longer-term assets.a. Receivables turnover=Sales/Receivablesb. Average Collection Peri

5、od=Accounts Receivable/Average Daily Credit Sales=365/Receivables turnoverc. Inventory Turnover=Sales/Inventory or COGS/Inventoryd. Fixed Asset Turnover=Sales/Fixed Assetse. Total Assets Turnover=Sales/Total assets第4頁/共20頁1. Ratio Analysis. 3. Liquidity ratios: Measure of the firms ability to pay of

6、f short-term obligations as they come due.a. Current Ratio=Current Assets/ Current Liabilitiesb. Quick Ratio=(Current assets-Inventory)/Current Liabilities第5頁/共20頁1. Ratio Analysis. 4. Debt-utilization ratios: Measures of the firms debt position evaluated in light of its asset base and earning power

7、.a. Debt to total assets=Total Debt /Total Assetsb. Times Interest Earned=Earnings before Interest and taxes (EBIT)/Interestc. Fixed Charge Coverage=Earnings before fixed charges and taxes /fixed chargesFixed charges=lease payment + interest expenseEarnings before fixed charges and taxes=EBIT + Leas

8、e payment 第6頁/共20頁1. Ratio Analysis. D. Interpreting financial ratios.1. Individually, financial ratios convey little meaning.2. Collectively, financial ratios provide an evaluation for the firms investors, creditors, and management.E. Du Pont system.1. The Du Pont Company was one of the first firms

9、 to stress the relationship of profitability and asset turnover in determining return on investment. 第7頁/共20頁1. Ratio Analysis. 2. The profitability of a firm is determined by its ability to utilize its assets efficiently by generating profitable sales.Return on Assets (Investment) = Profit Margin A

10、sset TurnoverNet income/Total assets =(net income/sales) (sales / total assets)3. Profit margin is the profit-per-dollar of sales.第8頁/共20頁1. Ratio Analysis. 4. Asset turnover indicates the dollar sales generated per dollar of assets employed.5. The return on equity is a function of a firms return on

11、 assets and its financing plan.Return on equity = (return on assets)/(1- Debt/Assets)第9頁/共20頁1. Ratio Analysis. F. Trend analysis consist of computing the financial ratios of a firm at various points in time to determine if it is improving or deteriorating.G. Comparative analysis provides the manage

12、ment and external evaluators with information as to how successful the firm is relative to other firms in the industry.第10頁/共20頁2. Impact of Inflation and Disinflation on financial Analysis. A. Impact on profits.1. First-in, first-out (FIFO) inventory valuation during inflation periods “understates”

13、 cost of goods sold and causes “inventory profits”.2. The use of replacement cost accounting reduces income and interest coverage during inflationary periods.第11頁/共20頁2. Impact of Inflation and Disinflation on financial Analysis. 3. A leveling off(平整，穩定) of prices, referred to as disinflation, may c

14、ause a reduction in profits. Some areas of the world, such as Russia, have experienced deflation, a decline in prices that results in widespread bankruptcies and a severe negative impact on the economy.B. Impact on asset value.1. Assets on the balance sheet are recorded at cost.第12頁/共20頁2. Impact of

15、 Inflation and Disinflation on financial Analysis. 2. In inflationary periods, the replacement cost of long-term assets may greatly exceed the reported values.3. The use of replacement cost accounting increases asset values during inflationary periods. This increase lowers the debt-to-asset ratio bu

16、t does not necessarily enhance the firms ability to service its debt.第13頁/共20頁2. Impact of Inflation and Disinflation on financial Analysis. C. Raising capital.1. Investors generally require higher rates of return during periods of inflation.2. Although earnings may drop because of disinflation, the

17、 declining rate of return demanded by investors may cause the value of a firms securities to increase.第14頁/共20頁2. Impact of Inflation and Disinflation on financial Analysis. 3. The movement away from financial assets (stocks and bonds) into tangible assets (gold, silver, etc.) by investors during pe

18、riods of inflation makes it difficult and more expensive for firms to raise capital. Likewise, the reverse trend during periods of disinflation enhances a firms ability to issue securities.第15頁/共20頁3. Other Elements of Distortion in Reported Income. A. Recognition of revenue.1. A conservative firm may recognize long-term installment sales revenues when payments are received, whereas other firms report the full amount of the sale as soon as possible.2. Firms that lease assets may report a long-term lease as a sale.第16頁/共20頁3. Other Elements of Distortion in Reported Income. B. Extraordinary