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ratios

Standardize numbers; facilitate comparisons

Used to highlight weaknesses and strengths

Used to highlight weaknesses and strengths

Liquidity

Can we make required payments as they fall due

Asset management

Do we have the right amount of assets for the level of sales

Debt management

Do we have the right mix of debt and equity

Profitability

Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA

Market value

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

DSO

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).

BEP

removes effect of taxes and financial leverage. Useful for comparison

ROA

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

P/E

How much investors will pay for $1 of earnings. Higher is better

M/B

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 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

focuses on:

Expense control (PM)

Asset utilization (TATO)

Debt utilization (EM)

It shows how these factors combine to determine the ROE.

Expense control (PM)

Asset utilization (TATO)

Debt utilization (EM)

It shows how these factors combine to determine the ROE.

"Average" performance

is not necessarily good.

Seasonal factors

can distort ratios.

Window dressing

techniques can make statements and ratios look better

Different accounting and operating practices

can distort comparisons.