Project Cost

Management
Module 4
Financial Ratios
Financial Ratio Analysis
• Financial ratio analysis is referred to as DuPont
model.
• Financial ratio analysis is to see how financial
operations drive value.
• Value Drivers: how an entity makes money
and increase its value.
• Financial Levers: method for identifying the
triggers of financial results.
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Using Financial Ratio Analysis

• Cross-company ratio analysis

• Cross-industry ratio analysis
• Cross-trend ratio analysis

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DuPont Method Pyramid

• Profitability Ratios
How much money a business is earning

• Activity Ratios
 Amount of assets needed to support the operations

• Solvency Ratios
 How leveraged or solvent the business is

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DuPont Method Pyramid

Profitability Ratio Solvency Ratio

Asset Ratio
• ROE • LM
• ROC • TATR D2E
• NPM • FATO • D2A
• OPM • NPPER • TIE
• TR • OAR • TBCR
• GPM • WCR • CR
• OER • ITO • QR
• DIOH
• ACRP
• APCP

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Return on Equity (ROE)

Return on Equity indicates how much profit was

generated by the equity invested in the
organization.

Net Income
ROE = Average Stockholder’s Equity

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Return on Capital (ROC)

Return on Capital is the percentage of an

organization’s net income generated relative to
the amount of capital that a company posses.

Net Income
ROC = Average Debt + Equity (capital)

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Net Profit Margin (NPM)

Net Profit Margin is the primary profitability

ratio that indicates the percentage of each
dollar of sales remaining after paying all costs
and income taxes.
Net Income
NPM = Sales

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Operating Profit Margin (OPM)

Operating Profit Margin indicates the

percentage of each dollar of sales that remains
after paying for all expenses with the exception
of income taxes.
I Income from Operations before Taxes
OPM = Sales

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Tax Rate (TR)

Tax Rate indicates the percentage of each dollar

of profit owed to the organization’s respective
taxing authorities.

Income Taxes
TR = Net Income before Income Taxes

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Gross Profit Margin (GPM)

Gross Profit Margin indicates the percentage of profit

derived on each dollar of sales after paying for the
cost of the sale but before the operating expenses,
interest expenses, and income taxes.
Gross Profit
GPM = Sales

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Operating Expense Ratio (OER)

Operating Expense Ratio indicates the

percentage of each dollar of sales used in
paying for the organization’s selling, general,
and administrative expenses.
Selling General and Adminstrative Expenses
OER = Sales

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Total Asset Turnover Ratio (TATR)

Total Asset Turnover Ratio indicates the

frequency that sales or revenues cycle in
proportion to the amount of assets deployed.

Sales
TATR = Total Average Assets

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Fixed Asset Turnover Ratio (FATO)

Fixed Asset Turnover Ratio indicates how

efficient an organization is at generating sales
given its level of fixed assets.

Sales
FATO = Average Fixed Assets

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Net Property, Plant and Equipment
Ratio (NPPER)
Net property, plant and equipment ratio
indicates the percentage of depreciated
property, plant, and equipment (PPE) required
to generate one dollar of sales.
Sales
NPPER = Average Net Property, Plant, and Equipment

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Other Asset Ratio (OAR)

Other Asset Ratio indicates the percentage of

other assets needed to generate one dollar of
sales.

Sales
OAR = Average Other Assets

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Working Capital Ratio (WCR)

Working Capital Ratio indicates the level of

investment the company has made to keep
operations going.

Avg Current Assets

WCR = Average Current Liabilities

Working Capital Turnover Ratio:

Sales
WCTR = Average Current Assets – Average Current Liabilities

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Inventory Turn Over (ITO)

Inventory Turn Over indicates how efficiently an

organization cycles its inventory in a given year.

Cost of Goods Sold

ITO = Average Inventory

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Days of Inventory on Hand (DOIOH)

Days of Inventory on Hand indicates the

amount of days it will take for your inventory on
hand to run out.

Average Inventory
DOIOH = (Quotient of Cost of Goods Sold) / 365)

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Accounts Receivable Collection
Period (ARCP)
Accounts Receivable Collection Period indicates
the number of days it takes to collect a credit
sale.

Average Accounts Receivable

ARCP = (Quotient of Credit Sales / 365)

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Accounts Payable Collection
Period (APCP)
Accounts Payable Collection Period indicates
the amount of days in which you pay for your
credit purchases.

Average Accounts Payable

APCP = (Quotient of Credit Sales / 365)

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Leverage Multiplier (LM)

Leverage Multiplier indicates the ratio of equity

to the total assets or capital.

Average Total Assets

LM = Average Total Equity

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Debt to Equity Ratio (D2E)

Debt to Equity Ratio indicates to what degree

an organization is financed by debt.

Average Total Debt

D2E = Average Stockholder’s Equity

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Debt to Assets Ratio (D2A)

Debt to Assets Ratio indicates to what degree

an organization’s assets are financed with debt.

Average Total Debt

D2A = Average Total Assets

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Times Interest Earned Ratio (TIE)

Times Interest Earned Ratio indicates how many

times an organization can pay its annual
interest expense burden out of earnings before
interest and taxes (EBIT)

Earnings Before Interest and Taxes

TIE = Interest Expense

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Times Burden Covered Ratio (TBCR)

Times Burden Covered Ratio is similar to TIE

ratio, but it also takes into account the principal
pay down of debt.

Earnings before Interest and Taxes

TBCR = Interest + (Quotient of Principal / by 1- Tax Rate)

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ROE = NPM x TATR x LM

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