Corporate Finance & International

controlling
(BPO)

Home work 2
On
The balance sheet and the important ratios

Date 28/April/2014
Submitted by Nitish Rawat Submitted to Prof. Katarina Adam
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Balance sheet
A balance sheet is a financial statement that summarizes a company's assets, liabilities and
shareholders' equity at a specific point in time.
A balance has three major element
Assets
Liabilities
Shareholders equity
Balance sheets equation - ( Assets = Liabilities + Shareholders' Equity)


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Assets Liabilities
Cash + Notes payable
+ Accounts receivable accounts payable
Total liabilities ____________________
Equity
Capital stock
+ Retained earnings
Total equity ____________________
Total assets ________ Total Liabilities + Total Equity
Key
Ratios
Profitability ratios

Gross margin = Gross Profit/Sales
The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with
producing the goods and services sold by a company

Operating margin = Operating income/sales
Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production
such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as
interest on debt

EBIT Margin = EBIT/sales
EBIT margin is EBIT divided by Sales. This value is useful when comparing multiple companies, especially within a given industry, and also
helps evaluate how a company has grown over time

Net Profit Margin = Net income / Sales
A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every
dollar of sales a company actually keeps in earnings


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Liquidity Ratios
Current Ratio = Current assets/ current liabilities
The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its
short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its
obligations

Quick ratio = Cash & short-term investments + Accounts receivable/Current liabilities
The quick ratio measures a companys ability to meet its short-term obligations with its most liquid assets. The higher the quick
ratio, the better the position of the company

Cash Ratio = Cash / current liabilities
The ratio of a company's total cash and cash equivalents to its current liabilities. The cash ratio is most commonly used as a
measure of company liquidity. Cash ratio can determine if, and how quickly, the company can repay its short-term debt


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Working capital ratios
Account receivable days = Accounts receivable/average daily sales
Accounts Receivable Days is an accounting concept related to Accounts Receivable. It is the length of time it takes to
clear all Accounts Receivable, or how long it takes to receive the money for goods it sells. This is useful for determining
how efficient the company is at receiving whatever short-term payments it is owed
Account payable days = Accounts payable / Average daily cost of sales
Accounts Payable Days is an accounting concept related to Accounts Payable. It is the length of time it takes to clear all
outstanding Accounts Payable. This is useful for determining how efficient the company is at clearing whatever short-
term account obligations it may have
Accounts receivable turnover = Annual sales/ Accounts receivable
An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The
receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets
Accounts payable turnover = annual cost of sales/ accounts payable
A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Accounts payable
turnover ratio is calculated by taking the total purchases made from suppliers and dividing it by the average accounts
payable amount during the same period
Inventory turnover = Annual cost of sales/ Inventory
A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can
then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or
"inventory turnover days



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Price earning ratio = Share price/ earnings per share
A valuation ratio of a company's current share price compared to its per-share earnings

EBIT/Interest coverage = EBIT/Interest expense
A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by
dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same
period

Assets turn over = sales/total assets
The amount of sales or revenues generated per dollar of assets. The Asset Turnover ratio is an indicator of the efficiency with
which a company is deploying its assets. The Higher the assets turn over more it good for a company

Return on equity = Net income/ book value of equity
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's
profitability by revealing how much profit a company generates with the money shareholders have invested

Return on assets= Net income + Interest expenses / Book Value of assets
Return on assets (ROA) is a financial ratio that shows the percentage of profit a company earns in relation to its overall resources.
It is commonly defined as net income divided by total assets
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References
Corporate finance (Berk Demarzo)
http://www.oldschoolvalue.com/blog/valuation-methods/balance-sheet-ratios/
http://www.accountingcoach.com/financial-ratios/explanation/2
http://www.investopedia.com/articles/basics/06/assetperformance.asp
http://www.investopedia.com/financial-edge/1012/useful-balance-sheet-
metrics.aspx
https://www.suu.edu/business/sbdc/pdf/balancesheetratios.pdf
http://www.money-zine.com/investing/investing/analyzing-the-balance-sheet/
http://www.bizmove.com/finance/m3b3.htm
http://smallbusiness.chron.com/importance-comparative-balance-sheet-annual-
report-76335.html
http://www.readyratios.com/reference/analysis/balance_sheet_analysis.html
http://www.retailowner.com/Portals/0/OwnersDashboard/TheROIKeyRatios.pdf
http://www.uwcc.wisc.edu/pdf/balanceshtratios.pdf
http://www.investopedia.com/
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