MBA NOTES:MBA NOTES

FINANCIAL LEVERAGE RATIO Total Debts to Assets: Provides information about the company's ability to absorb asset reductions arising from losses without jeopardizing the interest of creditors. Formula                     Total Liabilities                                    Total Assets Capitalization Ratio: Indicates long-term debt usage. Formula                 Long-Term Debit                                Long-Term + Owners Equity Debt to Equity: Indicates how well creditors are protected in case of the company's insolvency. Formula                 Total Debt                             ...

PROFITABILITY RATIOS: MBA NOTES Net Profit Margin (Return on Sales): A measure of net income dollars generated by each dollar of sales. Formula:       Net Income                       Net Sales Refinements to the net income figure can make it more accurate than this ratio computation. They could include removal of equity earnings from investments  Other income and other expense items as well as minority share of earnings and non-recurring items. Formula:       Net income                      (beginning + Ending Total Assets)/2 Operating Income Margin: A measure of the operating income generated by each dollar of sales Formula:       Operating Income                      Net Sales Return on Investment: Measures the income e...

LIQUIDITY RATIOS WORKING CAPITAL: Working capital compares current assets to current liabilities and serves as the liquid reserve available to satisfy contingencies and uncertainties, A high working capital balance is mandated if the entity is unable to borrow on short notice. The ratio indicates the short-term solvency of a business and in determining if a firm can pay its current liabilities when due. Formula:     Current assets - Current liabilities ACID TEST OR QUICK RATIO: A measurement of the liquidity position of the business. The quick ratio compares the cash plus cash equivalents and accounts receivable to the current liabilities. the primary difference between the current ratio and the quick ratio is the quick ratio does not include inventory and prepaid expenses in the calculation. Consequently, a business's quick ratio will be lower than its current ratio. It is a stringent test of liquidity. Formula:   ...

CLASSIFICATION OF RATIO ANALYSIS "Ratios" can be grouped into various classes according to "financial" activity or function to be evaluated. In view of the requirements of the various users of "ratios", we can classify then into the following categories. Liquidity "Ratios" Profitability "Ratios" Solvency "Ratios" "Financial" statement "analysis" is a judgemental process. One of the primary objectives is identification of major changes in trends and relationships and the investigation of the reasons underlying those changes, The judgement process can be improved by experience and the use of analytical tools. Probably the most widely used "financial" "analysis: technique is "ratio" "analysis" the "analysis" of relationships between two or more line items on the "financial" statement. "Financial" "ratios" are usually expr...