CORPORATE FINANCE: THEORY & PRACTICE

FINANCIAL RATIOS
Marta Degl’Innocenti
 LEARNING OBJECTIVES
• Understand how to standardize financial statements for
comparison purposes
• Understand how to compute and interpret important financial
ratios
 STATEMENT OF FINANCIAL
POSITION
Assets  Liabilities  Shareholders' equity

• The Balance sheet актив=пассив+акционерный капитал

1
 BALANCE SHEET: THE THREE
CONCERNS
• When analysing a statement of financial position, the
financial manager should be aware of three concerns:
• Liquidity: the ease and quickness with which assets can be
converted to cash. The more liquid a firm’s assets, the less
likely the firm is to experience problems meeting short-term
obligations.
• Debt Vs Equity:

Assets  Liabilities  Shareholders' equity

• Value versus Cost: The Accounting value and the market
value.

2
 INCOME STATEMENT
• The income statement measures performance over a specific
period. The accounting definition of income is: прибыль-
расходы=доход
Revenue  Expenses  Income

3
 INCOME STATEMENT:
THE THREE CONCERNS
• Non-cash items
• Since cash flow does NOT appear on an income statement,
financial manager should keep in mind those non-cash items
that are expense against revenues but do not affect cash flow,
e.g., depreciation.
• Time and Costs
• Short run: Certain equipment, resources and commitments of
the firm are fixed, but the time is long enough for the firm to
vary its output by using more labour and raw materials.
• Long run: All costs are variable.

4
 CASH FLOW
• To explain the change in accounting cash and equivalents.

5
 CASH FLOW: THE THREE PILLARS
• A firm’s cash flow comes from or goes to three main areas:
• Operating activities, CF(O): Generate by business activities,
including sales of goods and services.
• Investing activities, CF(I): From investing activities equals the
acquisition of non-current assets plus any security investments
minus the sales of non-current assets.
• Financing activities, CF(F): interests payment, dividend, stock
re-purchases
• Firm’s net cash flow (also know as free cash flow) can be
given as follows,

NCF  CF(O)  CF(I)  CF(F)

6
 RATIO ANALYSIS
• Liquidity ratios коэффицент ликвидности (short-term solvency
краткосрочная платежеспособность)
• Concerning firm’s ability to pay its bills over short run.
• Financial leverage ratios соотношение заемных средств (long-
term solvency долгосрочная платежеспособность)
• Long term ability to meet its obligation.
• Turnover ratios
• Concerning the effectiveness firm concerting assets to cash.
• Profitability ratios
• Operational performance.
• Market value ratios показатели рыночной стоимости
• Concerning the information not contained in financial statements.
7
 LIQUIDITY RATIOS
• Current ratio текущие соотношение
Current assets
Current ratio 
Current liabilities

• Since current assets and liabilities are converted to cash within

one year, the current ratio measures short-term liquidity.
• What happens if using cash to buy inventory?
• Quick ratio коэффициент ликвидности
• Given inventory is the least liquid current asset, relatively
large inventories are often a sign of short-term trouble.

Current assets  Inventory

Quick ratio 
Current liabilities
8
 FINANCIAL LEVERAGE RATIOS
ФИНАНСОВЫЕ РЫЧАГИ
• Total debt ratio общий долг
Total assets  Total equity
Total debt ratio 
Total assets

• Debt/Equity ratio Total assets  Total equity

Total debt ratio 
Total assets

• Times interest earned (Interest coverage

EBIT ratio)
TIE 
Interests

• Concerning how well a company has its interest obligations covered.

9
 TURNOVER MEASURES
• Inventory turnover
Operating expenses
Inventory turnover 
Inventory
• A high inventory turnover generally means that goods are sold faster
and a low turnover rate indicates weak sales and excess inventories
which may be challenging for a business.

Assuming that the operating expenses for the company is $6,000, and
the inventory worth $500. What is the inventory turnover in days?

Inventory turnover=$6,000/$500=12
So the days’ sales in inventory=365 days/12=31 days

10
 PROFITABILITY MEASURES
• Profit margin
Net income
Profit margin 
Revenues

• Return on assets (ROA)

Net income
Return on assets 
Total assets

• Return on equity (ROE)

Net income
Return on equity 
Total equity

• These measures are all based on book value!

11
 MARKET VALUE MEASURES
At the end of November 2014, the firm had 1,575.59 million shares
outstanding and its equity sold on the stock exchange for $9.225. If the
firm’s net income was $865 million, what is the earning for each share?
• Earning per share (EPS) доход на акцию
Net income 865
EPS  =  0.549
Shares outstanding 1,575.59
• Price-Earning ratio (P/E ratio) отношение цены акции к
доходу
Price per share 9.225
PE ratio  =  16.80
EPS 0.549

• Market-to-Book Ratio Market value per share

M/B ratio 
Book value per share 12