A Beginners Guide to Financial Ratio Analysis

This lecture introduces activity ratios:

• accounts receivable turnover

• inventory turnover

• payables turnover and their related days ratios:

  • days of sales outstanding

  • days of inventory on hand

  • number of days of payables.

    • cash conversion cycle

• Sherwin Williams contrasted with Facebook and Kroger

This lecture includes the following:

• how to compute the activity ratios for Sherwin-Williams, the paint manufacturing company, using a spreadsheet that you can find in the resources section.

• explains all of the links and computations in the spreadsheet

• analyzes the ratios for the current and previous periods for Sherwin-Williams.

This lecture includes the following:

• how to compute liquidity ratios for Sherwin-Williams

• how to interpret those ratios

• how to analyze the change in the ratios between two time periods and among several companies.

This lecture covers the following topics:

• capital structure and use of financial leverage

• the following ratios:

  • debt-to-equity

  • debt-to-capital

  • debt-to-assets

  • financial leverage

  • interest coverage

  • fixed charge coverage

• how to calculate and interpret Sherwin-Williams's ratios

• comparison of Sherwin-Williams's ratios to Facebook and Kroger.

This lecture explains the following:

• gross profit margin

• operating profit margin

• pretax margin

• net profit margin

• how to increase gross profit margin

• operating leverage

• computation and interpretation of Sherwin-Williams's ratios

• comparison of Sherwin-Williams's ratios to Facebook and Kroger

This lecture explains the following:

• why earn a return

• return on assets

• operating return on assets

• return on total capital

• return on equity

• computation and interpretation of Sherwin-Williams's ratios

• comparison to Facebook and Twitter

This lecture explains the following:

• how to compare different company's stock prices

• earnings yield ratio

• price earnings ratio

• preferred stock compared to bonds and common stock

• stock splits affect on ratios

• computation and interpretation of Sherwin-Williams's ratios

• comparison of Sherwin-Williams to Facebook and Kroger

This lecture explains the following:

• how to compare a company to its peers

• ratio comparisons of Sherwin-Williams to Facebook and Kroger for

  • activity ratios

    • trade-offs of

      • high, low accounts receivable

      • high, low inventory

      • high, low accounts payable

  • liquidity ratios

    • do companies want a lot of cash?

  • solvency ratios

  • profitability ratios

  • valuation ratios

This lecture will explain how to conduct a Dupont Analysis, including the following:

• Disaggregation of return on equity:

  • Two way: return on assets x financial leverage

  • Three way: profit margin x asset turnover x financial leverage

  • Five way: operation profit margin x interest burden x tax burden x asset turnover x financial leverage

  • Computation and interpretation of ratios

• Five way comparison analysis of Sherwin-Williams, Facebook, and Kroger

This lecture will explain how to conduct an in-depth five-way Dupont Analysis for Sherwin-Williams, Facebook, and Kroger, including the following:

• Two way: profit margin x equity turnover

• Three way: profit margin x asset turnover x financial leverage

• Five way: operation profit margin x interest burden x tax burden x asset turnover x financial leverage

• Computation and interpretation of ratios

This lecture will explain how to do an equity analysis, including the following:

• Types of stock investments:

  • Income

  • Growth

• Analyzing income stocks:

  • Dividend yield

  • Dividend payout

  • Sherwin-Williams spreadsheet example

• Analyzing growth stocks:

  • Retention rate

  • Sustainable growth rate

  • Sherwin-Williams spreadsheet example

• Equity ratio comparison: Sherwin-Williams, Facebook, Kroger

This lecture will show how to screen for stock investments using tradingview.com

• Screening for income stocks using ratios learned in the class:

  • High dividend yield ratio

  • Low dividend payout (Not in free version of tradingview)

  • High ROE

  • Low Debt to Equity

  • High current ratio

  • High Market Capitalization

• Screening for growth stocks using ratios learned in the class:

  • High price-earnings ratio (want lowest of the high)

  • Low PEG ratio (The price/earnings to growth ratio  is a stock's price-to-earnings ratio divided by the growth rate of its earnings for a specified time period. Not in free version of tradingview)

  • High growth rate of EPS (Not in free version of tradingview)

  • High sustainable growth rate (Not in free version of tradingview)

  • High ROE

  • Low debt to equity ratio

This lecture will explain the following:

• Major forms of corporate debt

• Major debt rating agencies

• Fitch ratings

• Examination of major forms of debt for Sherwin-Williams

• Composition of Altman's Z-score

• Computation of Altman's Z-score for Sherwin-Williams

• Comparison of Altman's Z-score with Fitch rations for Sherwin-Williams, Facebook, and Kroger

This lecture will provide the following:

• Identify business segments

• Reveal business segment reporting for Sherwin-Williams, Facebook, and Kroger

• Analyze and interpret business segment reporting for Sherwin-Williams

This lecture provides the following:

• Explains how to use the forecasting tab in the financial ratios pack spreadsheet

• Provides

  • Three years of historical data

  • Five years of forecasted data

  • Input variables for

    • Balance sheet

    • Income statement

    • Days of sales outstanding

    • Days of inventory on hand

    • Number of days of payables

    • Debt to equity

    • Dividends paid

    • Stock buy back

• Illustrates how changing variables changes balance sheet and income statement for future five years

• Forecasting tab available in four spreadsheets in Resource Section:

  • Sherwin-Williams

  • Facebook

  • Kroger

  • Blank for your custom use

This lecture provides the following:

• Illustrates the impact of the use of the following accounting methods:

  • Depreciation methods and estimates

    • Straight-line

    • Accelerated

    • Useful lives

  • Inventory cost flow methods

    • LIFO

    • FIFO

  • Goodwill impairment

• Reveals where to find disclosure of accounting methods used for

  • Sherwin-Williams

  • Facebook

  • Kroger

This lecture provides a review of the following:

• Activity ratios

• Liquidity ratios

• Solvency ratios

• Profitability margin ratios

• Profitability return ratios

• Valuation ratios

• Visualization tools

• Dupont analysis

• Equity analysis

• Stock screening

• Credit analysis

• Segment reporting

• Forecasting

• Differences in accounting methods

• Summary of resources available for the course

This lecture provides some background company information for the Kroger case, which is the 27-question quiz that follows

Download this spreadsheet to see how the ratios are calculated for Sherwin-Williams

Download this spreadsheet to see how the ratios are calculated for Facebook

Download this spreadsheet to see how the ratios are calculated for Kroger

Download this spreadsheet to load the date for a company of your choice and have the ratios automatically computed

Download this pdf for a summary of all of the ratios, their computation, and their interpretation

For your information: Download these annual reports for the three companies analyzed in this course