Financial analysis using ratios

Master the basics of financial analysis and ratio analysis, learn to calculate and interpret key ratios, and apply them to real-world peers like Walmart, Amazon, and Google.

Analyze ratio analysis as a tool blending computation and interpretation to evaluate performance. Benchmark against historical and competitor data; recognize industry differences and the need for judgment alongside accounting method limitations.

Explore activity ratios that measure a company's efficiency, including inventory management and sales outstanding, and interpret working capital and fixed asset implications.

Calculate the debtors turnover ratio by dividing sales by the average debt to show how often receivables convert to cash, illustrating credit collection efficiency.

Analyze days sales outstanding as a liquidity measure of how quickly firms collect cash. Using Walmart, see a 4.2 day outstanding measure and superior collection efficiency compared with peers.

The inventory turnover ratio equals cost of sales divided by average inventory. A higher ratio indicates more efficient inventory management and faster turnover.

Calculate days inventory on hand by dividing average inventory by daily cost of sales to gauge how quickly stock turns into sales, with examples from Walmart, Apple, and Microsoft.

Calculate the payable turnover ratio by dividing cost of sales by average payables, using 2018–2019 data, to interpret supplier payment speed and compare peers like Walmart.

Calculate days payable outstanding by dividing average payables by daily cost of sales (cost of sales/365). Higher or lower DPO indicates liquidity and supplier negotiation strength.

Learn to calculate the working capital turnover ratio by dividing sales by average working capital. Interpret negative working capital and assess how efficiently a company funds operations.

Total assets turnover ratio measures revenue per asset. It uses sales over average total assets to assess asset efficiency, with higher ratios signaling stronger revenue generation, comparing Wal-Mart with peers.

Explore the fixed assets turnover ratio, which measures revenue against fixed assets using property, plant and equipment (excluding goodwill) to assess asset efficiency.

Revises key activity ratios, including days sales outstanding, inventory turnover, inventory days in hand, payable days, working capital turnover, and asset turnover.

Explore how liquidity ratios evaluate a company's ability to pay short-term obligations by examining the current ratio, quick ratio, cash ratio, defensive interval ratio, and cash conversion cycle.

Learn to calculate the current ratio, a liquidity metric using current assets and current liabilities, and interpret values (below 1 signals risk; above 1 signals sufficiency) with peer comparisons.

Calculate the quick ratio by adding cash, short-term securities, and receivables and dividing by current liabilities, excluding inventory, to assess a company’s near-cash liquidity.

Measure the cash ratio to assess a company's ability to pay current liabilities using only cash and cash equivalents, defined as cash plus short-term securities over current liabilities.

Explain the defensive interval ratio, a liquidity measure of how many days a company can operate with current assets such as cash, receivables, and short-term securities, using daily cash expenditure.

Explore the cash conversion cycle as a liquidity measure by combining days of inventory and sales outstanding and subtracting payables, illustrated with Walmart’s low CCC and implications for cash flow.

Review liquidity ratios: current ratio, quick ratio, and cash ratio, noting asset inclusion rules and the exclusion of inventories. Discuss the cash conversion cycle's relevance to liquidity.

Solvency ratios assess a company's ability to meet debt obligations using cash flows, covering debt to capital, asset ratio, net to equity ratio, capital gearing, financial leverage, and interest coverage.

Calculate the debt to capital ratio as debt divided by debt plus equity, interpret higher ratios as greater financial risk and solvency concerns, with examples like Walmart, Apple, and Microsoft.

Explore the debt to asset ratio to assess solvency, calculate it from balance sheet totals, and interpret high versus low ratios with real company examples.

Learn how the debt-to-equity ratio measures financing mix by dividing total debt by total equity, with Walmart and Home Depot examples, and how treasury stock buybacks affect equity and risk.

The capital gearing ratio measures debt per unit of equity by including fixed interest bearing securities, such as preference shares, in capital, differing from the equity ratio.

Calculate the financial leverage ratio as assets divided by average equity, and interpret higher leverage as more debt and less equity affecting solvency.

Calculate the interest coverage ratio by dividing EBIT by interest cost to assess a company’s ability to cover interest payments, with higher ratios signaling stronger earnings and solvency.

This quick formula revision reviews key solvency ratios, such as debt to capital, debt to equity, capital gearing, financial leverage, and interest coverage (EBIT to interest cost).

Analyze profitability ratios to see how much profit operations generate, including gross and operating profit margins, pre-tax and net margins, return on assets, economic capital, and return on equity.

Compute operating profit margin as operating profit divided by sales, derived from the income statement by subtracting SG&A from gross profit, to assess cost control trends across firms.

Calculate the pre-tax profit margin by dividing pre-tax profit by sales, and interpret Walmart’s margins and peers to gauge operational profitability and the effect of interest costs.

Learn how net profit margin, calculated as net profit divided by sales, reveals how much of revenue becomes profit after costs and taxes, illustrated by Walmart's historically low margins.

Explore return on assets, calculated as net profit divided by average assets, to assess how efficiently a company uses its assets to generate profits.

Compute return on capital by dividing operating profit by total capital (debt plus equity), including liabilities, and interpret roc/roic to assess how efficiently firms use capital.

Discover how return on equity measures how efficiently a company uses equity to generate profit, calculated as net profit attributable to equity holders divided by average equity, with sector-specific interpretations.

Revisit profitability ratios, including gross profit margin, operating profit margin, pre-tax margin, net profit margin, ROA, return on capital, and ROE.

Explore key market price valuation ratios, including earnings per share, price to earnings, PEG, price to cash flow, price to sales, and dividend metrics, to assess whether stock is undervalued.

Learn how to calculate earnings per share (EPS) by dividing net profit by weighted average shares outstanding, and interpret EPS trends across companies to assess valuation and growth.

Learn how the price-to-earnings ratio equals the current market price divided by earnings per share, and how to interpret high or low PE values using peer comparisons.

Calculate return on capital by dividing operating profit by total capital, including debt, equity, and lease liabilities, and compare firms like Walmart and Apple to gauge capital efficiency.

Calculate the dividend payout ratio by dividing dividend per share by earnings per share, and interpret high versus low payouts as signals of retention and growth.

Explore the dividend yield ratio, calculated as dividend per share divided by current market price, illustrated with Walmart to show price-based return.

Compute and interpret the price-to-sales ratio, a valuation metric that compares current market price to sales per share, using Walmart and peers to illustrate when stocks appear overvalued or undervalued.

Explore key valuation ratios, including price-earnings, PEG, price-to-cash-flow, price-to-sales, dividend yield, and dividend payout ratios, and learn how earnings, growth, and cash flow drive stock analysis.

Integrate activity, liquidity, solvency, profitability, and valuation; Walmart shows improving activity ratios yet weakening margins, liquidity concerns, and high valuation.

Amazon shows strong liquidity with a negative cash conversion cycle and improving activity ratios, and profitability rises with higher gross margins and returns on capital and equity.

Assess Facebook using liquidity ratios, noting seven times current ratio, no inventory, and a debt-free profile. Highlight gross margin near 80% and net margin around 40%.

Analyze Apple through key ratios to assess liquidity, profitability, and efficiency, noting strong liquidity with a negative cash conversion cycle, solid margins, and rising earnings per share.

Celebrate completing the financial analysis using ratios course as the instructor thanks students, reflects on adding value, and hints at future courses.