Financial Performance Ratios

Transcription

1 Tpics in Accunting: Financial Perfrmance Ratis The NDH Grup, Ltd. The NDH Grup, Ltd. September, 2010 Overview & Objective The accmpanying definitins fr financial perfrmance ratis have been cnsidered fr use in ur CFO utsurce engagements. While there is n definitive list f ratis r an authritative text utlining their definitin, these are generally accepted industry ratis/calculatins with ur wn emphasis added fr use in implementatins. Categry Activity r Efficiency Liquidity Slvency Prfitability Valuatin Financial Perfrmance Ratis Definitin Measure a cmpany s ability t manage its mst significant Balance Sheet accunts, which ultimately impact cash flw. They are particularly useful fr managing internal peratins. Measure a cmpany s shrt-term (a year r less in maturity) assets vs. liabilities, with mre stringent ratis cnsidering nly cash r marketable securities. Liquidity ratis are ften cited in lending cvenants. Measure a cmpany s lng-term (greater than ne year) liabilities vs. their ability t service them with either available equity r earnings frm peratins. Slvency ratis are ften cited in lending cvenants. Cnsiders bth simple prfit ratis and cmpany s prfits against assets r equity. Since bth utilize accrual prfit measures, adjustments must be made t determine the actual cash flws arrising frm such prfits. Measures a cmpany s ability t make returns n invested capital and sustain future grwth. These ratis are subjective, and typically cnsidered in the cntext f publically traded cmpanies where equity structures are mre permanent. Averaging Balance Sheet Amunts When Incme Statement amunts represent the numeratr f a rati, and Balance Sheet amunts represent a rati s denminatr the Balance Sheet figure must be an average fr the perid; this allws cnsistency between the tw amunts (makes cnsistent the native P&L perid f time and the BS pint in time). As we have primarily chsen t evaluate ratis n a quarterly basis we are using Balance Sheet figures fr the beginning and end f any quarter used in analysis. Current Issues with Intacct Implementatin As f this writing, the fllwing remain bstacles using the Intacct platfrm fr rati analysis and graphical presentatin. 1. Inability t Include Multiple Terms Within a Single Cmputatinal AGD Intacct s Cmputatinal Accunt Grup Definitins (AGDs) prvide nly tw perands nt multiple terms within a single AGD. This requires breaking-dwn cmputatins int single terms and then cmbining the terms t achieve the desired calculatin. 2. Deficiency in Perfrming Divisin Intacct s Cmputatinal ADGs cannt perfrm divisin when a numeratr is less than 1 (a decimal). As a result f this deficiency, we rewrked the inputs fr such ratis as DOH, DSO, and DPO s that the turnver ratis are first cmputed as a prduct rather than a qutient (we later cnvert the prduct by using the reciprcal functin (r [1/x]). 3. Output Errr When Graphing Decimal Values f Statistical Accunts Intacct s graphs will utput 1.0 fr any statistical accunt value less than ne (a decimal). There appears t be n wrkarund t this issue.

2 Financial Perfrmance Ratis Page 2 Activity r Efficiency Ratis Generally cmbine P & L amunts in the numeratr with Balance Sheet amunt in the denminatr. Inventry Turnver The higher the inventry turnver the shrter the perid inventry is held. Cst f Gds Sld (COGS as per inventry) Average Inventry Days f Inventry n Hand (DOH) The higher the DOH the lnger the perid inventry is held. Mre intuitive than the turnver rati. Number f Days in the Perid (fr quarterly results use ) Inventry Turnver Receivables Turnver The higher the receivables turnver the shrter the perid receivables remain unpaid. Revenue Average Trade Receivables Days f Receivables n Hand / Days f Sales Outstanding (DSO) The higher the DSO the lnger receivables remain unpaid. Mre intuitive than the turnver rati. Number f Days in the Perid (fr quarterly results use ) Receivables Turnver Payables Turnver The higher the payables turnver the shrter the perid payables remain unpaid. Purchases (generally cnsidered inventry related purchases) Average Trade Payables Days f Payables n Hand / Days f Payables Outstanding (DPO) The higher the DPO the lnger payables remain unpaid. Mre intuitive than the turnver rati. Number f Days in the Perid (fr quarterly results use ) Payables Turnver

3 Financial Perfrmance Ratis Page 3 Liquidity Ratis Bth numeratr and denminatr are Balance Sheet amunts, with the cash cnversin cycle a cmputatin invlving three efficiency ratis. Current Rati The higher the current rati the greater the liquidity. Ttal Current Assets Ttal Current Liabilities Quick Rati The higher the quick rati the greater the liquidity. Cash + ST Marketable Securities + A/R: Trade Ttal Current Liabilities Cash Rati The higher the cash rati the greater the liquidity. Cash + ST Marketable Securities Ttal Current Liabilities Cash Cnversin Cycle r Net Operating Cycle A measure f the time frm paying suppliers fr materials t cllecting cash frm the subsequent sale f gds prduced frm these materials. Days f Inventry (DOH) + Days f Receivables (DSO) Days f Payables (DPO)

4 Financial Perfrmance Ratis Page 4 Slvency Ratis The first subset f slvency ratis debt ratis utilize Balance Sheet amunts in bth the numeratr and denminatr. The secnd set cverage ratis use P & L measures in bth the numeratr and denminatr. Debt Ratis Debt-t-Equity The higher the rati the greater the cmpany s leverage r ptentially the less slvent the cmpany is. Ttal Debt (bth shrt-term and lng-term debt, but excludes A/P and accruals) Ttal Sharehlders Equity Financial Leverage The higher the rati the greater the leverage the cmpany has emplyed r ptentially the less slvent the cmpany is. Average Ttal Assets Average Ttal Equity Cverage Ratis Interest Cverage The higher the rati the mre slvent the cmpany, r a higher figure suggests a cmpany s ability t meet its interest bligatins. Earnings Befre Interest and Taxes (EBIT) Interest Payments

5 Financial Perfrmance Ratis Page 5 Prfitability Ratis The first subset f prfitability ratis return n sales utilize P & L measures in bth the numeratr and denminatr. The secnd set return n investment use P & L measures in the numeratr and Balance Sheet amunts in the denminatr. Return n Sales Grss Prfit, Net Prfit, Pretax Margin, Etc. The higher the margin the greater the indicatin f prfitability. Measure f Prfitability Revenue Return n Investment Return n Assets The higher the rati the greater the net incme per listed assets r the higher the leverage n usable assets. Net Incme Average Ttal Assets Return n Equity (abridged calculatin) The higher the rati the greater the equity returns fr stakehlders r measures the return earned n ttal equity capital. Net Incme Average Ttal Equity

6 Financial Perfrmance Ratis Page 6 Valuatin Ratis Here, we fcus dividend-related ratis, which attempt t capture bth the amunts f dividends (r distributins) paid cmpared t the earnings and the affects f retentin. Dividend-Related Retentin Rate The higher the rati the mre prfits are being retained by the firm. Net Incme t Cmmn Sharehlders Cmmn Sharehlder Dividends* Net Incme t Cmmn Sharehlders *Nte: Distributins can replace dividends. Als, fr mst pass-thrugh entities there s a single class f stakehlder and therefre n deductin fr preferred dividends. Sustainable Grwth Rate The higher the rati the greater the estimated future grwth r prvides a predictive measure f grwth cnsistent with retained prfits. Measurement is in percentage terms. Retentin Rate * Return n Equity Further Instructin & Use Fr further infrmatin regarding financial perfrmance ratis cntact yur Accunt Executive r call The NDH Grup, Ltd. at