Topics covered in the presentation:

Analyzing the Return On AssetsMeasuring LeverageMeasuring Liquidity

Plamena ArsovaCorporate Finance, 2015

Analyzing the Return On Assets

/ROA/

Profit Margin – measures the proportion of sales that find its way into profits

Profit Margin = net income sales

Operating Profit Margin = after-tax interest + net income

sales

The Du Pont SystemThe Du Pont Formula – the breakdown of

ROA into the product of turnover and margin; called after the chemical company that popularized the procedure

ROA = asset turnover operating profit margin

Measuring LeverageFinancial leverage – created by debt which

increases the returns to shareholders in good times and reduces them in bad times

Long-term debt ratio = long-term debt long-term debt + equity

Long-term debt-equity ratio = long-term debt equity

Total debt ratio = total liabilities total assets

• Times-Interest-Earned Ratio – the extend to which interest obligations are covered by earnings

Times-interest-earned = EBIT interest payments

• Cash Coverage Ratio – calculating operating cash flow by adding back depreciation

Cash Coverage = EBIT + depreciation interest payments

• Return on Equity /ROE/ - an extension of the Du Pont formula, breaking down the ROE into 4 parts – leverage ratio, asset turnover, operating profit margin and “debt burden”

ROE = net income = equity

= assets sales operating profit net income

equity assets margin after-tax interest +

net income

Measuring LiquidityLiquidity – the relative ease and speed at

which an asset can be converted into a medium of exchange

• Net-Working-Capital to = net working capital Total-Assets-Ratio total assets

• Current Ratio = current assets current liabilities

• Quick /Acid-Test/ Ratio = cash + marketable securities +

receivables

current liabilities

• Cash ratio = cash + marketable securities current liabilities

AppleFinancial Ratios, 2014

Profit MarginOperating

MarginROA

Long-term debt-equity

ratio

Total debt ratio

ROE Current ratio Quick ratio Cash ratio

22% 29% 15% 0,26 1,12 35% 108% 105% 40%

Sources:1. Principles of Corporate Finance, Brealey

Myers2. Wild Fundamental Accounting Principles,

John Wilde3. The Economics of Money, Banking, and

Financial Markets, Frederic Mishkin4. Presentations of Foundation of Finance,

D. Miteva5. www.nasdaq.com