Ratio Analysis

Question 1

What is the problem with the ROE breakdown?

Answer 1

Net income includes financing-related items (ex: interest expense)

Assets/Liabilities include both operating and financial items

Thus, there is no distinction between operations and financing

Question 2

Long-term operational asset management

Answer 2

How much sales revenue is generated on each dollar of long-term operational assets?
Examine asset turnover ratios.

Question 3

Working capital management (inventory, accounts receivable, accounts payable)

Answer 3

Are investments in inventory and receivables excessive?
Examine inventory and receivables turnover and days’ sales in inventory and receivables

Question 4

Financial Management Borrowing: investing excess cash

Answer 4

What is the interest rate on net borrowings?
How high is interest expense in relation to income?
What is the level of borrowing?
Examine return on financial assets.

Question 5

Operating Working Capital

Answer 5

Receivables + Inventories + Other Current Assets - Accounts Payable - Accrued Income Tax - Other Current Liabilities

Question 6

Net Long-Term Assets

Answer 6

PPE + Investments + Intangibles + Other Assets - Other Liabilities - Deferred Taxes - Non-Controlling Interest

Question 7

Debt

Answer 7

• Cash - Marketable Securities + Notes Payable + Accrued Interest + Current Maturity of Long-Term Debt + Long-Term Debt

(do this step first - all financing related items)

Question 8

Shareholder’s Equity

Answer 8

= Balance Sheet amount