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Performing a Financial Ratio Analysis for Adidas
Transcript of Performing a Financial Ratio Analysis for Adidas
WHAT ARE FINANCIAL RATIOS?
Financial ratios are computed from an organization’s income statement and balance sheet
Liquidity ratios measure a firm’s ability to meet maturing short-term obligations.
Inventory turnover measures the pace of the organization in selling its inventories as compared to industry averages
Financial Ratio Analysis for
Current Ratios measure the extent to which a firm can meet its short term obligations
Quick Ratios measure the extent to which a firm can meet its short term obligations without relying upon the sale of its inventories
Leverage ratios measure the extent to which a firm has been financed by debt
Debt-to-Total Assets Ratio is the percentage of total funds that is provided by creditors
Debt-to-Equity Ratio is the percentage of total funds provided by creditors versus by owners
Long-Term Debt-to-EquityRatio is the balance between debt and equity in a firm's long term capital structure
Times-Interest-Earned Ratio is the extent to which earnings can decline without the firm becoming unable to meet its annual interest cost
Activity ratios measure how effectively a firm is using its resources
Fixed Assets turnover measures sales productivity vis-a-vis plant and equipment utilization
Total Assets turnover measures whether the firm is generating sufficient volume of business for the size of its asset investment
Accounts Receivable turnover is the average length of time it takes a firm to collect credit sales
Average Collection Period is the average length of time it takes a firm to collect on credit sales
Profitability Ratios measure management's overall effectiveness as shown by returns generated on sales and investment
Gross Profit Margin is the total margin available to cover operating expenses and yield a profit
Operating Profit Margin is the profitability without concern for taxes and interest
Net Profit Margin is the after tax profits per dollar of sales
ROA is the after tax profits per dollar of assets
ROE is the after tax profits per dollar of stockholder's investment in the firm
Growth Ratios measure the firm's ability to maintain its economic position in the growth of the economy and industry
Sales Growth Ratio is firm's growth in sales
Net Income Growth Ratio is the firm's growth rate in profits
Computing financial ratios is like taking a picture because the results reflect a situation at just one point in time
Comparing ratios over time and to industry averages is more likely to result in meaningful statistics that can be used to identify and evaluate strengths and weaknesses.
Combining the results of the analysis of internal and external factors will lead to overall assessment. We need to consider both factors before coming up with a conclusion whether the company is strong or weak in certain ratios. Sometimes, the company may have improved internally, but the improvement may not be enough to meet the industry average which is used as the external benchmark.