Ratio & Variance Analysis

Gross Profit Margin

Sales (net) - COGS/ Sales (net)

[Profitability]

Profit Margin

Net Income/ Sales (net)

[Profitability]

EBIT

NI + Taxes + Net Interest Expense OR Sales - COGS - SGA - Depreciation

Return on Sales

Income before Interest Income, Interest Expense, Taxes / Sales (net)

[Profitability]

Operating Margin

EBIT / Sales

[Profitability]

Return on Assets (ROA)

Net Income / Avg. Total Assets

[Profitability]

DuPont ROA

Profit Margin*Assets Turnover

Year XXXX: NI/ Sales (net) * Sales (net)/ Avg. Total Assets

[Profitability]

Return on Equity (ROE)

Net Income/ Avg. Total Equity

[Profitability]

Operating Cash Flow Ratio

Cash Flow from Operations/ Current Liabilities

[Profitability]

Current Ratio

Current Assets/ Current Liabilities

—> Cash + MS + AR + Inv + Prepaids

Note: As Current Assets increase relative to non-current assets, Risk goes down but ROA goes down as well.

[Liquidity]

Quick Ratio

Cash & Cash Equivalents + ST MS + Receivables (net)/ Current Liabilities

[Liquidity]

Cash Ratio

Cash + MS/ CL

Note: most liquid/ conservative measure of risk

[Liquidity]

AR Turnover

Sales (net)/ Avg. AR (net)

Days Sales in AR

Ending AR (net)/ [Sales (net)/ 365]

[Liquidity]

Inventory Turnover

COGS/ Avg. Inventory

(Too High —> Surplus or Demand decreases)

(Too Low —> Shortage or Sales Price too low)

[Liquidity]

Days in Inventory

Ending Inventory/ (COGS/365)

[Liquidity]

Accounts Payable Turnover

COGS/ Avg. AP

Too low: Paying too quickly (poor cash management) or quick payment discount accepted

Too high: Difficulty paying on time, “red flag”

[Liquidity]

Days of Payables Outstanding

Ending AP/ (COGS/ 365)

[Liquidity]

Cash Conversion Cycle

Days Sales in AR + Days in Inventory - Days of Payables Outstanding

AR —> Cash —> AP —> Inventory —> AR …

Too Strict —> Sell slow, Collect fast

Too lax —> Sell fast, Collect slow

[Liquidity]

Debt-to-Equity

Total Liabilities/ Total Equity

[Solvency]

Total Debt Ratio

Total Liabilities/ Total Assets

—> Ratio goes down, risk goes down & vice versa

[Solvency]

Equity Multiplier

Total Assets/ Total Equity

A/E = 1 + D/E

[Solvency]

Times Interest Earned

Income before Interest Expense & Taxes/ Interest Expense

[Solvency]

EBITDA

Earnings before Interest, Depreciation, & Amortization

[Performance Metric]

EBITDA Top-Down

Sales - COGS - Operating Expenses (excluding depreciation and amortization)

EBITDA Bottom-Up

Net Income + Income Tax Expense + Interest Expense + Depreciation & Amortization

Earnings-per-Share (EPS)

Income Available to Common Shareholders/ Weighted Avg. Common Shares Outstanding (WACSO)

[Performance Metric]

Price-to-Earnings Ratio

Price per Share/ Basic Earnings per Share

—> If < industry, could be relatively undervalued —> Buy

—> If > industry, could be relatively overvalued —> Sell

[Performance Metric]

Dividend Payout

Cash Dividends/ Net Income

—> High = Fewer growth opportunities

—> Low = More growth opportunities

[Performance Metric]

Payout Rate vs. Retention Rate

Payout Rate = DPS/ EPS

Retention Rate = 1 - Payout Rate

[Performance Metric]

Asset Turnover

Sales (net)/ Avg. Total Assets

—> Too little (lost sales)

—> Too much (ROA decreasing)

[Performance Metric]

Total Fixed Costs

TFV/ Volume = FC per unit

[Variance Analysis]

Total Variable Costs

TVC = VC per unit*Volume

[Variance Analysis]

Contribution Margin

CM = Revenues (sales) - Variable Costs

[Variance Analysis]