FA 52 - Financial Ratio Calculations and Analysis

Summary

This video script offers a comprehensive guide to financial ratio analysis, aimed at helping potential investors and outsiders understand a company's financial health. It covers liquidity ratios, turnover ratios, long-term debt paying ability, profitability, and stock market performance, comparing figures between 2023 and 2024. The analysis reveals mixed results, with improved profitability and long-term debt management but decreased efficiency and a significant drop in inventory turnover. The script concludes by emphasizing the importance of understanding financial ratios for informed decision-making in investment and business management.

Takeaways

• 📘 The video provides a guide on how to download a counting workbook from a website to practice financial ratio analysis.
• 🔍 It mentions that the website offers both public and members-only videos covering every problem in the workbook.
• 💡 The script walks through the process of analyzing a company's financial health using various financial ratios, starting with liquidity ratios.
• 💧 The current ratio and the acid-test ratio are calculated to assess the company's ability to cover its short-term liabilities with its most liquid assets.
• 📉 There is a slight decrease in liquidity from 2023 to 2024, as indicated by a marginal drop in the current ratio.
• 🔄 The script then moves on to turnover ratios, which measure the efficiency of the company in managing its inventory and collecting receivables.
• 📦 Inventory turnover shows a decrease, indicating that the company is not selling through its inventory as efficiently as the previous year.
• 💳 Accounts receivable turnover improves, suggesting that the company is more effective in collecting debts from customers.
• 🏦 The debt ratio indicates a slight improvement in the company's debt position, with a decrease in the percentage of assets covered by liabilities.
• 📈 Profitability ratios such as gross profit percentage, return on sales, and return on assets show an overall improvement, reflecting better profit margins and asset utilization.
• 📊 The earnings per share (EPS) has significantly increased, which is a positive sign for the company's profitability and stock market performance.
• 📉 However, the dividend yield has decreased, making the stock less attractive for dividend-focused investors.
• 📈 The price-to-earnings (P/E) ratio has increased, suggesting that the market values the company's shares higher, possibly due to growth expectations.
• 📊 The video concludes that while there are mixed results in different areas of financial performance, the overall profitability of the company has improved.

Q & A

What is the main purpose of the video?

The main purpose of the video is to guide viewers through the process of analyzing a company's financial health using various financial ratios, based on a set of financial statements provided in a workbook.

How can viewers access the workbook mentioned in the video?

Viewers can access the workbook by visiting the website 'countingworkbook.com', clicking on the PDF link to download a copy, and also find additional videos and resources.

What are liquidity ratios and why are they important?

Liquidity ratios, such as the current ratio and the acid-test ratio, measure a company's ability to pay off its short-term liabilities. They are important for assessing the company's short-term financial health and its ability to meet immediate obligations.

What does the current ratio represent and how is it calculated?

The current ratio represents the ability of a company to pay off its current liabilities with its current assets. It is calculated by dividing current assets by current liabilities.

What does the acid-test ratio measure and what is the rule of thumb for evaluating it?

The acid-test ratio measures a company's ability to pay its current liabilities using its most liquid assets, excluding inventory and prepaid expenses. A rule of thumb is that a ratio of 0.9 or higher is considered safe.

What are turnover ratios and how do they differ from liquidity ratios?

Turnover ratios measure the efficiency of a company in managing its assets and liabilities, such as inventory turnover and accounts receivable turnover. They differ from liquidity ratios in that they focus on operational efficiency rather than short-term solvency.

How is the inventory turnover ratio calculated and what does it indicate?

The inventory turnover ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory. It indicates how many times a company's inventory is sold and replaced over a period, reflecting the efficiency of inventory management.

What is the debt ratio and how can it help in assessing a company's financial stability?

The debt ratio is calculated by dividing total liabilities by total assets and indicates the proportion of a company's assets that are financed through debt. It helps in assessing a company's financial stability by showing the level of leverage and the risk associated with it.

What does the return on assets (ROA) ratio measure and why is it significant?

The return on assets (ROA) ratio measures the efficiency with which a company uses its assets to generate profit. It is significant because it reflects the company's ability to generate returns from its investments and operations.

What is the earnings per share (EPS) and why is it important for investors?

Earnings per share (EPS) represents the portion of a company's profit allocated to each outstanding share of common stock. It is important for investors as it serves as a measure of the company's profitability on a per-share basis, influencing stock prices and investment decisions.

How does the price-earnings (P/E) ratio reflect the market's perception of a company's value?

The price-earnings (P/E) ratio is calculated by dividing the market price per share by the earnings per share (EPS). It reflects the market's perception of a company's value by indicating how much investors are willing to pay for each dollar of earnings, which can suggest expectations of future growth or other factors.

What is the dividend yield and how does it affect an investor's decision?

The dividend yield is calculated by dividing the dividends per share by the market price per share. It affects an investor's decision by indicating the return on investment in the form of dividends, which can be an important factor for income-focused investors.