Ratio analysis made easy
This presentation is the property of its rightful owner.
Sponsored Links
1 / 30

Ratio Analysis Made Easy PowerPoint PPT Presentation


  • 49 Views
  • Uploaded on
  • Presentation posted in: General

Ratio Analysis Made Easy. John W. Nelson III CONSULTANCY. Statements Used in Ratio Analysis. Balance Sheet Profit & Loss. Statements Used. Remember A balance sheet is only a picture in time A P&L is a moving picture in time This difference must be reconciled

Download Presentation

Ratio Analysis Made Easy

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Ratio analysis made easy

Ratio Analysis Made Easy

John W. Nelson III

CONSULTANCY


Statements used in ratio analysis

Statements Used in Ratio Analysis

  • Balance Sheet

  • Profit & Loss


Statements used

Statements Used

  • Remember

    • A balance sheet is only a picture in time

    • A P&L is a moving picture in time

    • This difference must be reconciled

  • The period of time from the last fiscal date in days must be computed

    • One year = 365 days

    • 1st quarter = 90 days

    • 3rd quarter = 270 days (and so forth)


The banker s easy method

The banker’s easy method

  • Everything is broken down to a day, a dollar or a percent

  • Now they can be compared to like periods for the same business, i.e..

    • This year to last year

    • This quarter to last quarter

  • Or compared to industry standards


Ratio comparisons

Ratio comparisons

  • Industry Standards

    • RMA

    • To get the NAICS number, go to:

      • http://www.census.gov/epcd/www/naics.html

    • For more industry comparisons, go to:

      • http://sbdcnet.utsa.edu/

      • http://www.bizstats.com/

    • Trade publications


Financial statements used in ratio analysis

Financial Statements used in ratio analysis

  • Balance Sheet

    • Assets

      • Current

      • Fixed

      • Other

    • Liabilities

      • Current

      • Long Term

    • Net Worth or Equity


What your balance sheet tells you

What Your Balance Sheet Tells You

  • ASSETS

    • Current (turn to cash within 12 months)

      • Cash

      • Accounts Receivable

      • Inventory

      • Deposits & Pre-paid


Balance sheet continues

Balance Sheet Continues

  • Liabilities

    • Current Liabilities

    • Long Term Liabilities

    • Loans Due Affiliates or Owners

  • Net Worth

    • Common Stock or Equity

    • Paid In Capital

    • Retained Earnings

    • Owners Draw (Partnership, LLC or Proprietorship)


Balance sheet

Balance Sheet

  • CAPITAL, NET WORTH OR EQUITY

    • Assets minus the liabilities

    • Net book value of the business

    • How leveraged the business is

    • Treasury Stock for corporations

    • Value of the stock for a corporation

    • Owners equity for partnerships, proprietorships or LLC’s


Statements used in ratio analysis1

Statements used in ratio analysis

  • Operating Statement, a/k/a Income & Expense Statement, Profit & Loss Statement or just P&L

    • Revenue or sales

    • Less Cost of Goods Sold (none if a service business)

      • Beginning Inventory

      • Plus purchases

      • Less ending inventory

      • Equals Cost of Goods Sold

    • Equals Gross Profit


P l continues

P&L Continues

  • Less All Expenses

    • Operating Expenses

    • Administrative Expenses

    • Selling Expenses

  • Equals Net Income

    • Plus Other Income

    • Less Other Expenses

  • Equals Net Profit Before Taxes


Operating statement p l what it shows you

Operating Statement (P&L) & What It Shows You

  • How you are doing, your report card

  • If sales are up or down compared to last like period

  • Your Cost of Goods Sold

  • Your Gross Profit

  • All expenses

  • Profit or loss


Ratio analysis

Ratio Analysis

  • Ratios take the temperature of a business

  • Ratios are computed by using the Balance Sheet & Operating Statement numbers

  • They will tell you how liquid a company is

  • They will tell you how it collects its money

  • They will tell you how they pay their bills

  • They will tell you how leveraged they are


Liquidity ratios

Liquidity Ratios

  • Current ratio = current assets/current liabilities

  • Current Assets $170,000

  • Current Liabilities$150,000

  • Equals 1.13 or $1.13 in current assets to pay for each $1 in current liabilities. Bankers like 2 or higher.


Liquidity assets cont

Liquidity Assets (cont.)

  • Working Capital considers what’s left after paying current debt

  • Current Assets minus Current Liabilities

  • Current Assets$170,000

  • Current Liabilities$150,000

  • Equals $ 20,000 left

  • Bankers like a positive number.


Liquidity ratios cont

Liquidity Ratios (cont.)

  • Acid test or Quick Ratio considers that inventory is not saleable, therefore eliminated

  • Currents Assets – Inventory/Current Liabilities

  • Current Assets $170,000

  • Minus Inventory$ 85,000

  • Equals$ 85,000

  • Divided by Current Liabilities of $150,000

  • Equals .56 or $.56 in Current. Assets to pay for each $1 in Current Liabilities.

  • Bankers like 1 or higher.


Asset management ratios

Asset Management Ratios

  • Accounts Receivable Turnover tells you how long it takes to collect them

  • Accounts Receivable times 365 days/Annual Sales (days must match period for which the ratio is being computed)

  • Accounts Receivable (from bal. sheet) $75,000 X 365 days = $27,375,000 (just a # to get to the answer)

  • Divided by Ann. Sales$900,000

  • Equals 30.4 days to collect, say 30 days

  • Bankers like to see this at industry standards


Accts rec turnover

Accts. Rec. Turnover

  • Assume your client needs $9,000 in working capital and can’t borrow it.

  • Solution…

  • Accts. Rec. of $75,000 divided by 30 days (A/R turnover) = $2,250 per day

  • Collect the A/R in 26 days (4 days quicker) rather than 30 days

  • 4 days X $2,250 = $9,000 now in cash


Inventory turnover

Inventory Turnover

  • Inventory Turnover Ratio tells how long it takes to sell the inventory

  • Inventory times 365 days/Cost of Goods Sold (days must match period for which the ratio is being computed)

  • Inventory (from bal. sheet)$85,000 X 365 days = $31,025,000 (just a # to get to the answer)

  • Divided by Cost of Goods Sold of $540,000

  • Equals 57.5 or 58 days to sell

  • Bankers like to see this at industry standards


Inventory turnover cont

Inventory Turnover Cont.

  • Maximize working capital thru inventory control

  • Inventory turns every 58 days & is $85,000

  • 58 days into $85,000 = $1,466 per day

  • Inventory can be restocked in 30 days, therefore you only need a 30 inventory on hand

  • 58 days – 30 days = 28 days (less inventory needed) X $1,466 = $41,048 now in the checking account rather than in inventory


Debt management ratios

Debt Management Ratios

  • Debt to Net Worth or Debt to Worth tells how leveraged a company is

  • Total Debt divided by Total Liabilities

  • Total Debt$204,000

  • Total Liabilities $ 87,000

  • Equals2.34 or for each $1 in net worth, creditors have $2.34, leverage 2.34 to 1. Bankers like 3 or lower.


Debt management ratios cont

Debt Management Ratios (cont.)

  • Accounts Payable Turnover tells how long a company takes to pay it’s bills

  • Formula is Accts. Payable times 365 days divided by Cost of Goods Sold

  • Accts. Payable$4,000 (from bal. sheet) X 365 days = $14,965,000 (a # just to get to the answer) divided by: Cost of Goods Sold$350,000

  • Equals42.75 or within 43 days bills are pd

  • Bankers like to see this 30 to 45 days or less


Accts payable cont

Accts. Payable Cont.

  • Accts. Payable of $41,000 divided by 43 days (turnover) = $953 per day owed

  • Usual terms due A/P are 2% 10 days, net 30 days, so lets see if we can pay in 10 days

  • 43 days – 10 days = 33 days X $953 (A/P per day) = $31,449 needs to be pd. to get to 10 days

  • Using the $41,048 saved in inventory, pay the payables down within 10 days & have $9,599 left for working capital, then take the 2% discount and save $7,000 (2% X $350K C of GS)


Accts payable cont1

Accts. Payable Cont.

  • Besides saving $7,000 taking the discounts consider this:

    • 2%, 10 days

    • Three 10 day period per month

    • 3 X 2% = 6% savings per month

    • 12 months X 6% = 72%

    • This assumes that you invest what you would have paid & the interest was figured like this.


Summary of savings

Summary of Savings

  • Dug $9,000 out of Accts. Payable

  • Dug $41,048 out of Inventory

  • Saved $7,000 from taking discounts

  • A total savings of $57,048

  • Got a 72% ROI on amount saved


Profitability ratios

Profitability Ratios

  • Profit margin or the percent of profit from sales

  • Net Profits divided by Net Sales

  • Net Profit $ 53,000

  • Net Sales $900,000

  • Equals .0588 or 5.9% net profit


Profitability ratios cont

Profitability Ratios (cont.)

  • Debt Service Coverage or how much $ do you have to pay current loan payments

  • Formula is Net Profit plus Depreciation divided by Current Portion Long Term Debt (CPLTD)

  • Net Profit $53,000 + $25,000 Depreciation= $78,000 cash flow for this year

  • CPLTD is $6,000 (from bal. sheet) divided into $78,000 = 13.0

  • Or you have $13 to pay every $l of term debt

  • Bankers like to see 2 or higher


The end thank goodness

The End – Thank Goodness

  • Thanks

  • For your time

  • For you attention

  • If you need further information:

    • John W. Nelson III

    • 16 Park St.

    • Newport, RI 02840-2104

    • Phone/fax 401-847-3083

    • E-mail: [email protected]

    • www.johnwnelson3rd.com

    • For copies of my publications: [email protected]


  • Login