Standardize numbers; facilitate comparisons
Used to highlight weaknesses and strengths
Can we make required payments as they fall due
Do we have the right amount of assets for the level of sales
Do we have the right mix of debt and equity
Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA
Do investors like what they see as reflected in P/E and M/B ratios
current ratio and quick ratio
lower than industry means its has a weak liquidity position
average number of days from sale until cash received. higher than industry means firm collects too slowly.
TA turnover not up to industry average
Caused by excessive current assets (A/R and inventory).
removes effect of taxes and financial leverage. Useful for comparison
is lowered by debt--interest expense lowers net income, which also lowers it
Increase in ROE
the use of debt lowers equity, and if equity is lowered more than net income
How much investors will pay for $1 of earnings. Higher is better
How much paid for $1 of book value. Higher is better
P/E and M/B
are high if ROE is high, risk is low.
Computron has higher proportion of inventory and current assets than Industry
Computron now has more equity (which means LESS debt) than Industry.
Computron has more short-term debt than industry, but less long-term debt than industry.
Computron has lower COGS (86.7) than industry (84.5), but higher other expenses.
Result is that Computron has similar EBIT (7.1) as industry.
We see that 2010 sales grew 105% from 2008, and that NI grew 188% from 2008.
So Computron has become more profitable.
We see that total assets grew at a rate of 139%, while sales grew at a rate of only 105%.
So asset utilization remains a problem.
Du Pont system
Expense control (PM)
Asset utilization (TATO)
Debt utilization (EM)
It shows how these factors combine to determine the ROE.
is not necessarily good.
can distort ratios.
techniques can make statements and ratios look better
Different accounting and operating practices
can distort comparisons.