14.4 Ratios

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Problem. Given historical and forecasted financial statements for Cutting Edge B2B Inc., create the

historical and forecasted financial ratios.

Solution Strategy. Calculate the financial ratios by referencing the appropriate items on the Income

Statement or Balance Sheet.

FIGURE 14.7 Historical and Forecasted Financial Ratios for Cutting Edge B2B Inc.

How To Build Your Own Spreadsheet Model.

1. Open the Cash Flow Spreadsheet. Open the spreadsheet that you created for Corporate

Financial Planning - Cash Flow and immediately save the spreadsheet under a new name using

the File | Save As command.

2. Profitability. These three ratios indicate the ability of the firm to use its assets productively in

generating revenues.

o Return on Sales (ROS) = EBIT / Sales. Enter =C19/C13 in cell C140 and copy it across.

o Return on Assets (ROA) = EBIT / Average Total Assets = EBIT / ((Total Assets (t-1) +

Total Assets (t)) / 2). Enter =C19/((B43+C43)/2) in cell C141 and copy it across.

o Return on Equity (ROE) = Net Income / Average Total Shareholders Equity = Net

Income / ((Total Shareholders Equity (t-1) + Total Shareholders Equity (t)) / 2). Enter

=C23/((B57+C57)/2) in cell C142 and copy it across.

3. Asset Turnover. These three ratios indicate the degree of profitability of the company.

o Receivables Turnover = Sales / Average Receivables = Sales / ((Receivables (t-1) +

Receivables (t)) / 2). Enter =C13/((B35+C35)/2) in cell C145 and copy it across.

o Inventory Turnover = Cost of Goods Sold / Average Inventories = Sales / ((Inventories

(t-1) + Inventories (t)) / 2). Enter =C14/((B36+C36)/2) in cell C146 and copy it across.

o Asset Turnover = Sales / Average Total Assets = Sales / ((Total Assets (t-1) + Total

Assets (t)) / 2). Enter =C13/((B43+C43)/2) in cell C147 and copy it across.

4. Financial Leverage. These two ratios indicate the degree of burden of the company's debt.

o Debt = Total Debt / Total Assets = (Short-term Debt + Long-term Debt) / Total Assets.

Enter =(C48+C51)/C43 in cell C150 and copy it across.

o Times Interest Earned = EBIT / Interest Expense. Enter =C19/C21 in cell C151 and copy

it across.

5. Liquidity. These two ratios indicate the ability of the company to pay its bills and remain solvent.

o Current = Total Current Assets / Total Current Liabilities. Enter =C37/C49 in cell C154

and copy it across.

o Quick = (Cash and Equivalents + Receivables) / Total Current Liabilities. Enter

=(C34+C35)/C49 in cell C155 and copy it across.

6. Market Value. These two ratios indicate the market value of the firm relative to accounting

measures of firm value.

o Price To Earnings = (Market Price / Share) / Earnings Per Shares. Enter =C62/C25 in cell

C158 and copy it across.

o Market To Book = (Market Price / Share) / (Total Shareholders Equity / Shares

Outstanding). Enter =C62/(C57/C24) in cell C159 and copy it across.

The financial ratios are very useful in interpreting the financial condition of the firm.

Problem. Given historical and forecasted financial statements for Cutting Edge B2B Inc., create the

historical and forecasted financial ratios.

Solution Strategy. Calculate the financial ratios by referencing the appropriate items on the Income

Statement or Balance Sheet.

FIGURE 14.7 Historical and Forecasted Financial Ratios for Cutting Edge B2B Inc.

How To Build Your Own Spreadsheet Model.

1. Open the Cash Flow Spreadsheet. Open the spreadsheet that you created for Corporate

Financial Planning - Cash Flow and immediately save the spreadsheet under a new name using

the File | Save As command.

2. Profitability. These three ratios indicate the ability of the firm to use its assets productively in

generating revenues.

o Return on Sales (ROS) = EBIT / Sales. Enter =C19/C13 in cell C140 and copy it across.

o Return on Assets (ROA) = EBIT / Average Total Assets = EBIT / ((Total Assets (t-1) +

Total Assets (t)) / 2). Enter =C19/((B43+C43)/2) in cell C141 and copy it across.

o Return on Equity (ROE) = Net Income / Average Total Shareholders Equity = Net

Income / ((Total Shareholders Equity (t-1) + Total Shareholders Equity (t)) / 2). Enter

=C23/((B57+C57)/2) in cell C142 and copy it across.

3. Asset Turnover. These three ratios indicate the degree of profitability of the company.

o Receivables Turnover = Sales / Average Receivables = Sales / ((Receivables (t-1) +

Receivables (t)) / 2). Enter =C13/((B35+C35)/2) in cell C145 and copy it across.

o Inventory Turnover = Cost of Goods Sold / Average Inventories = Sales / ((Inventories

(t-1) + Inventories (t)) / 2). Enter =C14/((B36+C36)/2) in cell C146 and copy it across.

o Asset Turnover = Sales / Average Total Assets = Sales / ((Total Assets (t-1) + Total

Assets (t)) / 2). Enter =C13/((B43+C43)/2) in cell C147 and copy it across.

4. Financial Leverage. These two ratios indicate the degree of burden of the company's debt.

o Debt = Total Debt / Total Assets = (Short-term Debt + Long-term Debt) / Total Assets.

Enter =(C48+C51)/C43 in cell C150 and copy it across.

o Times Interest Earned = EBIT / Interest Expense. Enter =C19/C21 in cell C151 and copy

it across.

5. Liquidity. These two ratios indicate the ability of the company to pay its bills and remain solvent.

o Current = Total Current Assets / Total Current Liabilities. Enter =C37/C49 in cell C154

and copy it across.

o Quick = (Cash and Equivalents + Receivables) / Total Current Liabilities. Enter

=(C34+C35)/C49 in cell C155 and copy it across.

6. Market Value. These two ratios indicate the market value of the firm relative to accounting

measures of firm value.

o Price To Earnings = (Market Price / Share) / Earnings Per Shares. Enter =C62/C25 in cell

C158 and copy it across.

o Market To Book = (Market Price / Share) / (Total Shareholders Equity / Shares

Outstanding). Enter =C62/(C57/C24) in cell C159 and copy it across.

The financial ratios are very useful in interpreting the financial condition of the firm.