財務(wù)指標的講義課件

RATIOANALYSIS

1

RATIOANALYSIS

1RatioOverviewRatiosprovideamethodofstandardization2RatioOverviewRatiosprovideaRatioOverview Asmentionedratiosprovideamethodofstandardizationbutmoreimportantly-theyprovideaprofileoffirm’seconomiccharacteristicsandcompetitivestrategies.3RatioOverview AsmentionedraRatioOverviewAlthoughextremelyvaluableasanalyticaltools,financialratiosalsohavelimitations.Theycanserveasscreeningdevices,indicateareasofpotentialstrengthorweakness,andrevealmattersthatneedfurtherinvestigation.Shouldbeusedincombinationwithotherelementsoffinancialanalysis.Thereisnoonedefinitivesetofkeyratios;Thereisnouniformdefinitionforallratios;andthereisnostandardthatshouldbemetforeachratio.Thereareno"rulesofthumb"thatapplytotheinterpretationoffinancialratios.4RatioOverviewAlthoughextremeCaveatseconomicassumptions-linearityassumptionbenchmarkmanipulation–timing

accountingmethodsnegativenumbers

5Caveatseconomicassumptions-CommonSizeFinancialStatements Differencesinfirmsizemayconfoundcrosssectionalandtimeseriesanalyses.Toovercomethisproblem,commonsizestatementsareused.AcommonsizebalancesheetexpresseseachitemonthebalancesheetasapercentageoftotalassetsAcommonsizeincomestatementexpresseseachincomestatementcategoryasapercentageoftotalsalesrevenues6CommonSizeFinancialStatemenAcommonsizeincomestatement7AcommonsizeincomestatementFourcategoriesofratiosActivityratios–theliquidityofspecificassetsandtheefficiencyofmanagingassetsLiquidityratios–firm'sabilitytomeetcashneedsastheyariseDebtandSolvencyratios–

theextentofafirm'sfinancingwithdebtrelativetoequityanditsabilitytocoverfixedchargesProfitabilityratios–theoverallperformanceofthefirmanditsefficiencyinmanaginginvestment(assets,equity,capital)ThesecategoriesarenotdistinctasweshallseeActivityLiquidityActivityProfitabilitySolvencyProfitability

8FourcategoriesofratiosActiA.ACTIVITYRATIOS:ASSETMANAGEMENT&EFFICIENCY9A.ACTIVITYRATIOS:ASSETMANAGACTIVITYRATIOS:

ASSETMANAGEMENT&EFFICIENCY

Short-term(operating)activityratios:InventoryTurnoverRatio

COGS/(Averageinventory)ReceivableTurnoverRatioSales/(Averageaccountsreceivable)

10ACTIVITYRATIOS:

ASSETMANAGEa)InventoryTurnover

RatioCOGS/(Averageinventory)

Measuresefficiencyoffirminmanagingandsellinginventory.Highratiorepresentfewerfundstiedupininventories--efficientmanagement.Inventorydoesnotlanguishonshelves.Highturnovercanalsorepresentunderstockingandlostorders.Lowturnovercanalsorepresentlegitimatereasonssuchaspreparingforastrike,increaseddemand,etc.Ratiodependsonindustry--(perishablegoodsetc.)Average#ofdaysinventoryinstock=365/(InventoryTurnoverRatio)11a)InventoryTurnoverRatioCOb)ReceivableTurnoverRatioSales/(Averagereceivables)HowmanytimesreceivablesareturnedintocashRelativelylowturnovermayindicateinefficiency,cutbackindemand,orearningmanipulation.(Whenavailable,thefigureforcreditsalescanbesubstitutedfornetsalessincecreditsalesproducethereceivables.)

Average#ofdaysreceivablesoutstanding=365/(A/RTurnoverRatio)Providesinformationaboutthefirm'screditpolicyShouldbecomparedwiththefirm'sstatedpolicy(i.e.,iffirmpolicyis30daysandaveragecollectionperiodis60days,companyisnotstringentincollectioneffort.)12b)ReceivableTurnoverRatioShort-term(operating)activityratios:

High/lowrelativetotheindustryshouldbeexamined(i.e.,highreceivableturnovermightindicatelostsalestocompetitorsascredittermstootight).

Lowturnoverratiosmayimplyfirm’sincomeoverstatedfutureproductioncutbacksfutureliquidityproblems

13Short-term(operating)activitACTIVITYRATIOS:

ASSETMANAGEMENT&EFFICIENCY

Long-term(investment)activityratios:FixedAssetsTurnoverRatio

=Sales/

AveragefixedassetsTotalAssetsTurnoverRatio=Sales/

AveragetotalassetsFixedAssetandTotalAssetTurnoveraremeasuresoftherelationbetweensalesandinvestmentsinlong-livedassets;i.e.theefficiencyintheuseoftheseassets.Howmuchofaninvestmentisrequiredtogenerateagivenlevelofsales?14ACTIVITYRATIOS:

ASSETMANAGELong-term(investment)activityratiosWhentheassetturnoverratiosarelow,relativetotheindustryorhistoricalrecord,eithertheinvestmentinassetsistooheavyand/orsalesaresluggish.Theremay,however,beplausibleexplanations:thefirmmayhavetakenanextensiveplantmodernization.

15Long-term(investment)activitB.LIQUIDITYRATIOS:SHORTTERMSOLVENCY16B.LIQUIDITYRATIOS:SHORTTERMImportanceofWorkingCapital

OperatingCycle

Goal:Shortenthecycle17ImportanceofWorkingCapitalActivityratiosasmeasure(s)ofliquidity

TheOperatingcycleandtheCashCycle(NetTradeCycle)

Operatingcycle

–thenumberofdaysittakesforthefirm’soperationsto“convert”intocashiscalculatedasthenumberofdaysinventoryisinstock[365/inventoryturnover]

PLUSthenumberofdays

receivableareoutstanding[365/Receivableturnover]

Notethatforamanufacturingcompany,thelengthoftheoperatingcyclemustalsoconsiderthetimethatmoneyistiedupbyproduction.(Box3-1) 18Activityratiosasmeasure(s)Activityratiosasmeasure(s)ofliquidity

TheOperatingcycleandtheCashCycle(NetTradeCycle)

Cashcycle–thenumberofdaysacompany'scashistiedupbyitscurrentoperatingcycleiscalculatedasOperatingcycle LESSthe

#ofdaysaccountspayableareoutstanding

(365/A/PTurnover)

A/PTurnover=Purchases/AverageaccountspayablepurchasesareapproximatedbyCOGSplusendinginventorieslessbeginninginventories.

19Activityratiosasmeasure(s)CashCycle

OperatingandCashCycles

CashCycle=CircumferenceofShadedArea20CashCycle

OperatingandCashCashCycle

#ofdayscashtiedup

#ofdaysinventory(365/InventoryT/O)+#ofdaysA/R(365/A/RT/O)=Operatingcycle-#ofdaysA/P(365/A/PT/O)=Cashcycle“Cashcycle”canprovideinterestinginsightasforcertaine-commercecompanies(especiallye-tailers)“float”exists–negativecashcycle21CashCycle

#ofdayscashtiedAmazonCashCycle22AmazonCashCycle22Dell

Source:DellAnnualReportJanuary31,2004KeyRatiosFISCAL-YEARENDED(Jan/Feb) 2004 2003 2002 2001 2000

Daysofsupplyininventory 3 3 4 5 6Daysofsalesoutstanding 31 28 29 32 34Operatingcycle(subtotalnotinDellA/R) 34 31 33 37 40Daysinaccountspayable 70 68 69 58 58Cashconversioncycle (36) (37) (36) (21) (18)23Dell

Source:DellAnnualRepDollarGeneral

EstimatingcostofcashcycleAnnualsales=$3.2billion;Dailyaverage=$8.8million($3.2/365)SinceCostofsalesis72%ofsales,companyfinances(.72x8.8=)$6.4millionforeachdayofitscashcycleCompany’scashcycle=101days.Thereforecompany“carries”101x6.4=$646.4milliononaverage.At7%interest;Annualcost=$45.2millionDailycost=$448,000/dayofcashcycleEachdaythecashcycleisreduced,thecompanysavesalmostahalfmilliondollars--$448,000!24DollarGeneral

Estimatingcos

Workingcapitalratios

Short-termliquidityanalysiscomparesthefirm'scashresourceswithitscashobligations.Theseratiosmeasureshorttermsolvency--theabilityofthefirmtomeetitsdebtrequirementsastheycomedue.Cashresourcescanbemeasuredbyeither:thesumofthecurrentcashbalanceandpotentialsourcesofcash,or(net)cashflowsfromoperationsCashobligationscanbemeasuredbyeither:Currentobligationsrequiringcash,orCashoutflowsarisingfromoperations

25

Workingcapitalratios

ShortLIQUIDITYRATIOS Thefollowingtablesummarizestheratioscommonlyusedtomeasuretherelationshipbetweenresourcesandobligations

Numerator Denominator CashResources CashObligationsLevel Currentassets CurrentliabilitiesFlow Cashflowfromoperations Cashoutflowsforoperations

Conceptually,theratiosdifferastowhetherlevels(amountsshownonthebalancesheet;or

flows(cashinflowsandoutflows)areusedtogaugetherelationship.26LIQUIDITYRATIOS Thefollowing

Threeratioscomparelevelsofcashresourceswithcurrentliabilitiesasthemeasureofcashobligations

CurrentRatioCurrentassets/CurrentliabilitiesQuickRatio(Cash+Marketablesecurities+A/R)/CurrentliabilitiesCashRatio(Cash+Marketablesecurities)/Currentliabilities27

ThreeratioscomparelevelsoDell(revisited)

Source:DellAnnualReportJanuary31,2004KeyRatiosFISCAL-YEARENDED(Jan/Feb) 2004 2003 2002 2001 2000Currentratio 0.98 1.00 1.05 1.44 1.47Quickratio 0.81 0.81 0.82 1.16 1.28

Daysofsupplyininventory 3 3 4 5 6Daysofsalesoutstanding 31 28 29 32 34Operatingcycle(subtotalnotinDellA/R) 34 31 33 37 40Daysinaccountspayable 70 68 69 58 58Cashconversioncycle (36) (37) (36) (21) (18)28Dell(revisited)

Source:DelTwootherratioscombineflowswithresources/obligations

CashFlowfromOperationsRatioCFO/CurrentliabilitiesDefensiveInterval 365x[Cash+MarketableSecurities+A/R]ProjectedExpenditures

29TwootherratioscombineflowsCashburnratioOriginallydevelopedinthesixties,thedefensiveintervalnevercaughtonwiththeanalystcommunity.Recently,howeverithasenjoyedaresurgenceinpopularityintheformofthecashburnrate.Appliedforthemostparttostart-upandrapidlygrowingtechnologycompanies,theratiomeasureshowmuchcashthefirmconsumesoveragivenperiodoftimeEstimatesthenumberofdays(defensiveinterval)thecompanycansurvivewiththecashithasraisedfromitsinvestors(privateplacementorIPO).Forstart-upcompanieswithnorevenues,onlycashexpendituresmatter.Forsuchcompanies,theratio,ineffect,measureshowmuchtimethecompanyhasuntilitmusthaveaworkingbusinessmodel.

30CashburnratioOriginallydeveExcerptfrom:“NetWorth”byPeterElstrom,BusinessWeekE.BIZ,September18,2000;P.EB114

31Excerptfrom:“NetWorth”byPFollow-uponabovecompaniesCompany

18-Sep

29-Dec

%Change52weekHigh

EnPointe

$8.00

$3.12

-60.9%

$55.00Acclaim

$2.00

$0.03

-98.4%

$6.63GCqualificationissued11/29Streamline

$0.69

$0.00

-99.7%

$12.00 Ceasedoperations11/13IdeaMall

$3.56

$1.12

-68.4%

$15.50Wavo

$0.75

$0.04

-95.2%

$8.63 Auditorresigns10/29

NASDAQ 3,726.522,470.52 -33.7% 32Follow-uponabovecompaniesCashburnratio(2000)Cash(+M/S)availableCashneedsCashNeeds=CFO;orCFO+capitalexpenditureAmazonUsing(CFO+capitalexpenditure)Annual(2000)

822+278=1,100=4.2yrs130+135265

Quarter(1stquarter2001)447+196=643=1.5qtrs

407+19426Cantheybesofarapart???33Cashburnratio(2000)Amazon33Cashburnratio(2001)Cash(+M/S)availableCashneedsCashNeeds=CFO;orCFO+capitalexpenditureAmazonUsing(CFO+capitalexpenditure)Annual(2001)

540+456=996=5.6yrs120+50170

Quarter(1stquarter2002)297+449=746=3.0qtrs

241+5246Cantheybesofarapart???34Cashburnratio(2001)Amazon34GENERALELECTRICCO.

WorkingCapitalTrends-CashFlow

1991–199435GENERALELECTRICCO.

WorkingCC.DEBT&SOLVENCYRATIOS:DEBTFINANCINGANDCOVERAGE36C.DEBT&SOLVENCYRATIOS:DEBTDEBT&SOLVENCYRATIOS:

DEBTFINANCINGANDCOVERAGETheuseofdebtinvolvesriskbecausedebtcarriesfixedcommitments(interestcharges&principalrepayment).

Whiledebtimpliesrisk,italsointroducesthepotentialforincreasedbenefitstothefirm'sowners(leverageeffectillustratedinnextsection).Thereareotherfixedcommitments,suchasleasepayments,thataresimilartodebtandshouldbeconsidered37DEBT&SOLVENCYRATIOS:

DEBTDebtRatios DebttoCapital= Debt/(Debt+Equity)DebttoAssets= Debt/TotalassetsDebttoEquity= Debt/Shareholders'equity(Debtcanincludetradedebt--usuallyitdoesnot)

38DebtRatios DebttoCapitalCoverageRatiosRevenues $700,000Expenses 600,000EBIT 100,000InterestExpense20,000EBT 80,000Taxes(30%) 24,000NetIncome 56,000Interestcoverageratiosmeasuretheabilityofthecompanyto“cover”itsrequiredinterestpaymentsoutofincome.Sinceinterestpaymentsaretaxdeductible,theappropriateincomemeasureisEBIT.Timesinterestearned=Operatingprofit(EBIT)Interestexpensei.e.100,000=520,000Thelargertheratio,themoretheinterestpaymentsare“protected”.InthiscaseEBITis5xtherequiredpayments.Incomecanfall(5-1)/5=80%beforetheinterestpaymentsarejeopardized.39CoverageRatiosRevenues $70CoverageRatiosFixedchargecoverage=

Operatingprofit+LeasepaymentsInterestexpense+LeasepaymentsNote:Leasepaymentsareaddedtonumeratorbecausetheyweredeductedinordertoarriveatoperatingprofits.Coverageratioscanalsobecalculatedonacashbasise.g.InterestcoverageCFO+Taxpaid+InterestpaidTaxpaidNote:cashtaxandcashinterestpaidarerequireddisclosuresunderFASB95:SoCF40CoverageRatiosFixedchargecoOtherSolvencyratiosusingCFOCapitalExpenditureratio=

CFO/CapitalexpendituresMeasuresfirmsabilitytogeneratecashflowstocovercapitalexpenditures.ItisameasureofFreeCashFlowsinratioform.(IfCFO>1;FCFis+ve)CFOtoDebtratio=

CFO/DebtMeasuresfirmsabilityto“cover”itsdebtwithitsCFO.41OtherSolvencyratiosusingCFDebtcovenantsandSolvencyDebtcovenantsareoftenexpressedintermsoffinancialratios.Itisimportanttoexaminetheproximitytoatechnicalviolationfortworeasons:

(1) itimpliespotentialcostsofrenegotiation;and

(2) itimpliespotentialearningsmanagement.

42DebtcovenantsandSolvencyDebD.PROFITABILITYRATIOS:

OVERALLEFFICIENCY&PERFORMANCE43D.PROFITABILITYRATIOS:

OVERProfitabilityratios

GrossProfitMargin=Grossprofit/SalesMeasurestheabilityofthefirmtocontrolcostsofinventoriesand/ormanufacturingcostandtopassalongpriceincreasesthroughsalestocustomers.

OperatingProfitMargin=

Operatingprofit/SalesMeasuresoveralloperatingefficiency–natureoffirm’sadministrativeandmarketingoverhead

NetProfitMargin=NetIncome/SalesMeasureofoverallprofitabilityafterallitemsincluded(revenues,expenses,tax,interest,etc.).Itisanoverallmeasureofafirm'sabilitytocontrolthelevelofexpensesrelativetorevenuesgenerated.

“By-product”ofCommonsizestatements44ProfitabilityratiosGrossProReturnonInvestment(ROI)measures

-ROA&ROEROA--RateofreturnonassetsNetincome+Interestexpense(netofincometaxsavings)Averagetotalassets

Byaddingbackinterestexpense,weactuallymeasuretherateofreturnonassetsasifthefirmisfullyfinancedwithequity.Thisratioprovidesaperformancemeasurethatisindependentofthefinancingofthefirm'sassets.ROE--RateofReturnonCommonShareholders'Equity

NetincomeAveragecommonequity

45ReturnonInvestment(ROI)meaRelationshipofROAandROEtoProvidersofInvestmentBase

EffectsofLeverage

Schematically,wecanshowtherelationshipas

Debt

+AssetsOperatingIncome–Interest=NetIncome

Equity

ROAROERevenues $700,000Expenses 600,000EBIT 100,000InterestExpense20,000EBT 80,000Taxes(30%) 24,000NetIncome 56,000Howisthisincomeallocated?46RelationshipofROAandROEtoNumericalillustration:

AssumeacompanyhasAssetsof$600,000financedby$400,000ofequityand$200,000ofdebt.AlsoassumethefollowingincomestatementThatisthe$70,000generatedbytheassetsisdistributedasfollows:Tothedebtholder $14,000Totheequityshareholder56,000 $70,000AffectsonLeverageforEquityholder* Returnon$400,000Invests400,000earns11.67% 46,667/400,000=11.67%Onborrowedfundsof200,000earns11.67%butpays7%.Thereforeearnsspreadof4.67%;(11.67%-7%)x200,000=9,333/400,000=2.33%Total

56,000/400,000=14.00%*Thisrelationshipcanbeexpressed(seefollowingsection)asROE=ROA+(ROA-CostofDebt)xD/E=11.67%+(11.67%-7%)x(200,000/400,000)*Alternatively,NetIncome+Interest(1-t)=56,000+20,000(.7)=$70,00047Numericalillustration:

AssumeDisaggregationofROA

Tosimplifymatters,weillustrateROAonapre-taxbasis.

ROA =EBIT/Assets =[EBIT/Sales]x[Sales/Assets] =Profitabilityx Activity CommonSize InventoryT/O I/SComponents A/RT/O FixedAssetT/O48DisaggregationofROA

Tosimpl4949DisaggregationofROESimilarlyforROEwefindROE=EBT Equity=EBT x Sales x Assets Sales Assets Equity =Profitabilityx ActivityxSolvency

CommonSize InventoryT/O Debt/Equity I/SComponents A/RT/O Debt/Assets FixedAssetT/O50DisaggregationofROESimilarlyThreeComponentDisaggregationofROEROE=NetIncomeEquity=NetIncomex SalesxAssetsSalesAssetsEquity=ProfitabilityxActivityxSolvencyFiveComponentDisaggregationofROEROE=NetIncomeEquity=EBITxEBTxNetIncomexSalesxAssetsSalesEBITEBTAssetsEquity=ProfitabilityxActivityxSolvencyOperationsxFinancingxTaxesProfitabilitycanbefurtherdisaggregatedasfollows

NetIncome/Sales =[EBIT/Sales]x[EBT/EBIT]x[NetIncome/EBT] =OperationsxFinancingxTaxesThisleadstoafive-waydisaggregationofROEOnanafter-taxbasis51ThreeComponentDisaggregationAdditionalinsightsintotherelationshipofROE&ROA

InthethreewaydisaggregationofROE,thefirsttwocomponentsareROAcalculatedonanafterinterestbasisWecanexpressROEintermsofROAdirectlyas(againusingpre-taxnumberstosimplifymatters)

ROE =EBIT-Interestx Assets Assets Equity =[ROA-Interest]x Assets Assets EquityThistermwithsomemanipulationcanbeconvertedto*ROE=ROA+(ROA-CostofDebt)x[Debt/Equity]Leveragingisonlyprofitableifthereturnonassetsisgreaterthanthecostofdebt

52AdditionalinsightsintotherTherelationshipbetweenreturn(ROE)&risk(b)AnobviousparalleltothisequationforROE(returnonequity)ROE=ROA+(ROA-CostofDebt)x[Debt/Equity]istheequationforthebetaofafirm(be)be=ba+(ba-bd)x[Debt/Equity]wherebaandbdaretheunleveredbetaandthebetaofdebtrespectively.53Therelationshipbetweenretur

RATIOANALYSIS

54

RATIOANALYSIS

1RatioOverviewRatiosprovideamethodofstandardization55RatioOverviewRatiosprovideaRatioOverview Asmentionedratiosprovideamethodofstandardizationbutmoreimportantly-theyprovideaprofileoffirm’seconomiccharacteristicsandcompetitivestrategies.56RatioOverview AsmentionedraRatioOverviewAlthoughextremelyvaluableasanalyticaltools,financialratiosalsohavelimitations.Theycanserveasscreeningdevices,indicateareasofpotentialstrengthorweakness,andrevealmattersthatneedfurtherinvestigation.Shouldbeusedincombinationwithotherelementsoffinancialanalysis.Thereisnoonedefinitivesetofkeyratios;Thereisnouniformdefinitionforallratios;andthereisnostandardthatshouldbemetforeachratio.Thereareno"rulesofthumb"thatapplytotheinterpretationoffinancialratios.57RatioOverviewAlthoughextremeCaveatseconomicassumptions-linearityassumptionbenchmarkmanipulation–timing

accountingmethodsnegativenumbers

58Caveatseconomicassumptions-CommonSizeFinancialStatements Differencesinfirmsizemayconfoundcrosssectionalandtimeseriesanalyses.Toovercomethisproblem,commonsizestatementsareused.AcommonsizebalancesheetexpresseseachitemonthebalancesheetasapercentageoftotalassetsAcommonsizeincomestatementexpresseseachincomestatementcategoryasapercentageoftotalsalesrevenues59CommonSizeFinancialStatemenAcommonsizeincomestatement60AcommonsizeincomestatementFourcategoriesofratiosActivityratios–theliquidityofspecificassetsandtheefficiencyofmanagingassetsLiquidityratios–firm'sabilitytomeetcashneedsastheyariseDebtandSolvencyratios–

theextentofafirm'sfinancingwithdebtrelativetoequityanditsabilitytocoverfixedchargesProfitabilityratios–theoverallperformanceofthefirmanditsefficiencyinmanaginginvestment(assets,equity,capital)ThesecategoriesarenotdistinctasweshallseeActivityLiquidityActivityProfitabilitySolvencyProfitability

61FourcategoriesofratiosActiA.ACTIVITYRATIOS:ASSETMANAGEMENT&EFFICIENCY62A.ACTIVITYRATIOS:ASSETMANAGACTIVITYRATIOS:

ASSETMANAGEMENT&EFFICIENCY

Short-term(operating)activityratios:InventoryTurnoverRatio

COGS/(Averageinventory)ReceivableTurnoverRatioSales/(Averageaccountsreceivable)

63ACTIVITYRATIOS:

ASSETMANAGEa)InventoryTurnover

RatioCOGS/(Averageinventory)

Measuresefficiencyoffirminmanagingandsellinginventory.Highratiorepresentfewerfundstiedupininventories--efficientmanagement.Inventorydoesnotlanguishonshelves.Highturnovercanalsorepresentunderstockingandlostorders.Lowturnovercanalsorepresentlegitimatereasonssuchaspreparingforastrike,increaseddemand,etc.Ratiodependsonindustry--(perishablegoodsetc.)Average#ofdaysinventoryinstock=365/(InventoryTurnoverRatio)64a)InventoryTurnoverRatioCOb)ReceivableTurnoverRatioSales/(Averagereceivables)HowmanytimesreceivablesareturnedintocashRelativelylowturnovermayindicateinefficiency,cutbackindemand,orearningmanipulation.(Whenavailable,thefigureforcreditsalescanbesubstitutedfornetsalessincecreditsalesproducethereceivables.)

Average#ofdaysreceivablesoutstanding=365/(A/RTurnoverRatio)Providesinformationaboutthefirm'screditpolicyShouldbecomparedwiththefirm'sstatedpolicy(i.e.,iffirmpolicyis30daysandaveragecollectionperiodis60days,companyisnotstringentincollectioneffort.)65b)ReceivableTurnoverRatioShort-term(operating)activityratios:

High/lowrelativetotheindustryshouldbeexamined(i.e.,highreceivableturnovermightindicatelostsalestocompetitorsascredittermstootight).

Lowturnoverratiosmayimplyfirm’sincomeoverstatedfutureproductioncutbacksfutureliquidityproblems

66Short-term(operating)activitACTIVITYRATIOS:

ASSETMANAGEMENT&EFFICIENCY

Long-term(investment)activityratios:FixedAssetsTurnoverRatio

=Sales/

AveragefixedassetsTotalAssetsTurnoverRatio=Sales/

AveragetotalassetsFixedAssetandTotalAssetTurnoveraremeasuresoftherelationbetweensalesandinvestmentsinlong-livedassets;i.e.theefficiencyintheuseoftheseassets.Howmuchofaninvestmentisrequiredtogenerateagivenlevelofsales?67ACTIVITYRATIOS:

ASSETMANAGELong-term(investment)activityratiosWhentheassetturnoverratiosarelow,relativetotheindustryorhistoricalrecord,eithertheinvestmentinassetsistooheavyand/orsalesaresluggish.Theremay,however,beplausibleexplanations:thefirmmayhavetakenanextensiveplantmodernization.

68Long-term(investment)activitB.LIQUIDITYRATIOS:SHORTTERMSOLVENCY69B.LIQUIDITYRATIOS:SHORTTERMImportanceofWorkingCapital

OperatingCycle

Goal:Shortenthecycle70ImportanceofWorkingCapitalActivityratiosasmeasure(s)ofliquidity

TheOperatingcycleandtheCashCycle(NetTradeCycle)

Operatingcycle

–thenumberofdaysittakesforthefirm’soperationsto“convert”intocashiscalculatedasthenumberofdaysinventoryisinstock[365/inventoryturnover]

PLUSthenumberofdays

receivableareoutstanding[365/Receivableturnover]

Notethatforamanufacturingcompany,thelengthoftheoperatingcyclemustalsoconsiderthetimethatmoneyistiedupbyproduction.(Box3-1) 71Activityratiosasmeasure(s)Activityratiosasmeasure(s)ofliquidity

TheOperatingcycleandtheCashCycle(NetTradeCycle)

Cashcycle–thenumberofdaysacompany'scashistiedupbyitscurrentoperatingcycleiscalculatedasOperatingcycle LESSthe

#ofdaysaccountspayableareoutstanding

(365/A/PTurnover)

A/PTurnover=Purchases/AverageaccountspayablepurchasesareapproximatedbyCOGSplusendinginventorieslessbeginninginventories.

72Activityratiosasmeasure(s)CashCycle

OperatingandCashCycles

CashCycle=CircumferenceofShadedArea73CashCycle

OperatingandCashCashCycle

#ofdayscashtiedup

#ofdaysinventory(365/InventoryT/O)+#ofdaysA/R(365/A/RT/O)=Operatingcycle-#ofdaysA/P(365/A/PT/O)=Cashcycle“Cashcycle”canprovideinterestinginsightasforcertaine-commercecompanies(especiallye-tailers)“float”exists–negativecashcycle74CashCycle

#ofdayscashtiedAmazonCashCycle75AmazonCashCycle22Dell

Sour