Capítulo 3. EL PROCESO DE REFRIGERACIÓN
3.1.4 Ciclo de potencia
Ratio analysis involves methods of calculating and interpreting financial ratios to analyze and monitor the firm’s performance.
CATEGORIES OF FINANCIAL RATIOS
Financial ratios can be divided for convenience into five basic categories
• Liquidity
A firm’s ability to satisfy its short-term obligations as they come due is called liquidity. Liquidity refers to the solvency of the firm’s overall financial position the ease with which it can pay its bill. These ratios are viewed as a good indicator of cash flow problems. The two basic measures of liquidity are:
CURRENT RATIO
A measure of liquidity calculated by dividing the firm’s current assets by its current liabilities. It measures the firm’s ability to meet its short term obligations. It is expressed as follow:
` Current assets
Current ratio =
Current liabilities
INTERPRETATION
As our current ratio is less than 1 so it is not the favorable situation for the company.
Years 2006 2007 2008
Current ratio .79 .93 .84
QUICK (ACID TEST) RATIO
The quick ratio measures the liquidity and is calculated by dividing the firm’s current assets minus inventory by its current liabilities. It is calculating as follow:
Current assets – Inventory
As quick ratio of 1.0 or greater is occasionally recommended but in 3 years data quick ratio is less than 1 its mean firm is not in better measure of overall liquidity.
ACTIVITY RATIO
It measures the speed with which various accounts are converted into sales or cash inflows or outflows.
A number of ratios are available for measuring the activity of the most important current accounts which includes inventory, account receivable, and account payable.
It includes following ratios:
Inventory Turnover Average Collection period Average Payment period INVENTORY TURNOVER
It commonly measures the activity, or liquidity, of a firm’s inventory. It is calculated as follows.
INTERPRETATION
Inventory turnover is meaning full when it is compared with other firm in the same industry.
TOTAL ASSETS TURNOVER
It indicates the efficiency with which the firm uses its assets to generate sales. It is calculated as follows:
Sales Total assets turnover =
Total assets
Years 2006 2007 2008
Assets turnover .82 .89 .67
INTERPRETATION
Higher a firms total assets turnover more efficiently its assets has been used.
Company uses its assets more efficiently in year 2006 and 2007 rather than 2008.
DEBT RATIO
The debt position of a firm indicates the amount of others people’s money being used to generate profits. The more debts a firm use in relation to its total assets, the greater its financial leverage.
FINANCIAL LEVERAGE
The magnification of risk and return introduced through the use of fixed cost financing, such as that debt and preferred stock.
There are two types of measuring debt ratio of a firm.
Degree of indebtedness (debt ratio)
Ability to service debts (time interest earned ratio)
DEBT RATIO
It measures the proportion of total assets financed by the firm’s creditors. The higher this ratio, the greater the amount of other people’s money being used to generate profits. It is calculated as follows:
Total liabilities Debt ratio = Total assets TIME INTEREST EARNED RATIO
It is also called interest coverage ratio, measures the firm’s ability to make contractual interest payments it is calculated as follows.
Earning before interest and taxes Time interest earned ratio =
Interest PROFITABILITY RATIO
There are many measures of profitability. As a group, these measures enable the analyst to evaluate the firm’s profit s with respect to a given level of sales, a certain level of assets, or the owners’ investment.
It includes the following ratios
• Gross profit margin
• Operating profit margin
• Net profit margin
• Earning per share
• Return on total assets (ROA)
• Return on equity (ROE) GROSS PROFIT MARGIN
It measures the percentage of sales dollar remaining after the firm has paid for its goods. It is calculating as follow:
Sale – CGS Gross profit margin =
Sale
Gross profit C.G.S =
Sales
Years 2006 2007 2008
Gross profit margin 12.44 14.78 13.07
INTERPRETATION
The higher the gross profit margin the lower the cost of merchandize sold. Its mean in 2007 gross profit margin is greater in 2007 rather than in 2006 and 2008.
OPERATING PROFIT MARGIN
It measures the percentage of each sales dollar remaining after all costs and expenses other than interest, taxes, and preferred stock dividend is deducted.
It is also called pure profit earned on each sales dollar. It is calculating as follow:
Operating profits
Operating profit margin represents pure profits earned on each rupee. Higher operating profit margin is preferred in 2007 it is higher so company earned more profits in 2007.
NET PROFIT MARGIN
It measures the percentage of each sales dollar remaining after all costs, expenses, including interest and taxes have been deducted.
It is calculating as follow…
Net profit Net profit margin =
Sales
Years 2006 2007 2008
Net profit margin (.83) 1.50 (5.19)
INTERPRETATION
Higher net profit margin is preferred which is greater in 2007.
EARNINGS PER SHARE
EPS represents the number of dollars earned during the period on behalf of each outstanding share of common stock. It is calculating as follow:
Earning available for common stockholders EPS =
No. of shares common stock outstanding
Years 2006 2007 2008
Earning per share (1.29) 2.78 (6.34)
INTERPRETATION
It represents the rupees amount earned on behalf of each share. Company earned much more rupees in 2007 rather than 2006 and 2008.
RETURN ON TOTAL ASSETS
It is also called the return on investment measures the overall effectiveness of management in generating profit with its available assets. The higher the firms return on total assets the better the firm is.
Earning available for common stockholders ROA =
Total assets
Years 2006 2007 2008
Return on assets (1.29) 2.84 (7.30)
INTERPRETATION
Return on assets indicates that how much firm earned on each rupee of asset investment.
RETURN ON EQUITY (ROE)
The return on common equity measures the return earned on common stockholders investment in the firm. It is calculating as follow.
Earning available for common stockholders ROE =
Common stock equity
years 2006 2007 2008
Return on equity (3.12) 4.58 (14.06)
INTERPRETATION
It represents that how much company earned on each rupee of common stock equity.
PRICE/EARNING RATIO
It measures the amount that investors are willing to pay for each dollar of the firm’s earning. The higher the price earning ratio the greater is investors’ confidence.
Market price per share of common stock P/E ratio =
EPS
Years 2006 2007 2008
Price/earning ratio (16.48) 9.37 (3.43)
INTERPRETATION
It indicates that investors were paying 9.37 in 2007 for each rupee.
MARKET/BOOK RATIO
It provides an assessment of how investor views the firm’s performance. Firm expected to earn high return relative to their risk typically sells at higher market/book multiples.
Common stock equity Book value per share of common stock =
Number of shares of common stock outstanding
years 2006 2007 2008
Market/book ratio .51 .43 .50
INTERPRETATION
It indicates that investors are currently paying for each rupee.