Fundamentals of Financial Accounting & Analysis

...

Ratio #

Profitability Measures and Ratios

Year 4

Calculation

1

Gross Margin Ratio

2

Cost Ratio

3

SG&A Ratio

4

EBIT Margin Ratio

5

Profit Margin Ratio

6

Effective Tax Rate (ETR)

7

NOPAT

Efficiency Ratios

8

Asset Turnover

9

Days Sales in Inventory (DSI)

10

Days Sales Outstanding (DSO)

11

Days Payable Outstanding (DPO)

12

Cash Conversion Cycle

Management Effectiveness Ratios

13

Return on Assets

14

Return on Equity

15

Market Capitalization (Market Cap)

16

Return on Invested Capital

---------------------------------------------------------------

Financial Strength Ratios

17

Current Ratio

18

Quick Ratio

19

Debt to Capital Ratio

20

Interest Coverage Ratio

21

Effective Interest Rate (after tax)

Valuation Ratios

22

Market-to-Book Ratio

23

Free Cash Flow to Equity (FCFE)

24

% FCFE Returned

25

Dividend Payout Ratio

26

Dividend Yield

27

Total Return to Shareholders

28

Cost of Equity, using 3.5% Rf and 6% Risk Premium

29

WACC

---------------------------------------------------------------

Basic and Diluted EPS

EPS is used by many to assess a firm’s performance relative to various “benchmarks,” such as:

- another firm at a point in time

- the same firm at a previous point in time

- investors’ expectations (predictions for EPS).

There are two GAAP-based EPS measures:

- Basic

- Diluted

Basic EPS = Net Income / Number of Shares

Assume:

Net Income = $50. Number of Shares = 25.

Then:

Basic EPS = $2

Diluted EPS = Net Income / Adjusted Number of Shares

Adjust shares for in-the-money stock options (net of share repurchases using the strike price).

Note to Students: There are other items that can affect Diluted EPS, but options are the quite prevalent in the U.S. We will cover options only.

Only in-the-money options are used to calculate Diluted EPS.

It doesn’t matter if they are vested or not.

So, firms must include all in-the-money options, both vested and non-vested options.

Continuing with the above example, assume the firm would add 15 shares to the denominator for the effect of in-the-money stock options.

Therefore, Diluted EPS = $50 / (25 + 15) = $1.25

Analysts’ Consensus EPS

“Consensus EPS” is the average, expected EPS across equity research analysts.

Assume five analysts are covering this firm, and the expected, Diluted EPS, and the related average, are as follows:

Analyst

Expected EPS

1

1.42

2

1.38

3

1.32

4

1.36

5

1.29

Average