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Ratio Analysis Notes
Ratio Analysis Notes
Ratio Analysis Notes
Income statement
Sales (at selling price) *with markup
Cash (CA) 10
Sales (Income) 10
C
Income Tax Payable (CL) 1
Cash (CA) 1
CR>1, CA>CL
Before transaction after transaction
Current Ratio: CA 6 = 1.2 -1 5 = 1.25
CL 5 -1 4
4-1
DSO= AR / (Annual sales/365)
AR
40 = $7 ,300,000/365
40= AR/$20,000
AR = $800,000
4-2
Debt
Total debt to total capital= Debt + Equity
Since M/B ratio = 1, market value of equity equals BV of equity
Common equity = stock price x #of Shares outstanding
$14 x 5,000,000 shares = $70M
Debt
Total debt to total capital= Debt + Equity
= $55/ $125
= 0.44 or 44%
4-3
ROE = NI/EQT
ROE= PM x TATO x EM
ROA
ROE= NI x S x TA
S TA EQT
ROA= PM x TATO
10%= 2% x TATO
TATO= 5 times
ROE= ROA x EM
15% = 10% X EM
EM= 1.5
4-4
M/B ratio= Market price per share/ Book Value per share
= $32/$7.5 = 4.2667