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**MGT 497 Financial, Trends, Ratios**

Prof. Rick Hayes, Ph.D., CPA

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**Game Weighting Factors**

Return on Assets (ROA) Return on Equity (ROE) Market Share (MS) Stock Price (SP) Unit Production Costs (UPC) Total Net Income (TNI)

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**Average Net Income Yr 3 thru 6 Average Year End Assets Yrs 3 thru 6**

Return on Assets (ROA) Return on Total Assets Average Net Income Yr 3 thru 6 Average Year End Assets Yrs 3 thru 6 = This ratio measures how well assets have been employed. 55 55

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Return on Equity Return on Equity Average Net Income Yrs 3 thru 6 Average Shareholders’ Equity Yrs 3 thru 6 = This ratio measures the ability of management to generate net income from the resources the owners provide. 56 56

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**Market Share, Stock Price, Unit Production Cost**

Total Company Dollar Sales Yrs 3 t 6 Total Industry Dollar Sales Yrs 3 thru 6 = Stock Price = Average Year end stock Price Years 3 thru 6 Unit Production Cost (UPC) = Average Unit Production Cost Years 3 thru 6 Total Net Income (TNI) = Sum of Net Income for Years 3 thru 6 56 56

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**Ratios Liquidity: Current Ratio Leverage: Debt to Equity**

Quick Ratio Leverage: Debt to Equity Times Interest Earned (Times Covered) Debt to Assets Profitability: Net/Gross profit margins Return on Invested Capital (ROIC) Return on Total Assets (ROA) Return on Shareholder’s Equity (ROE) Activity: Days Sales Outstanding (DSO) Inventory Turnover Shareholder : Total Shareholder Returns Returns Price Earnings Ratio (P/E) Dividend Yield Illustration 7.3 35

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**Measures a company’s ability to satisfy its short-term liabilities**

Liquidity Ratios = Current ratio Current assets Current liabilities Measures a company’s ability to satisfy its short-term liabilities = Acid-test ratio Quick assets Current liabilities Provides a more stringent indication of a company’s ability to pay its current liabilities

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**Leverage Ratios Total liabilities Debt to equity ratio**

= Debt to equity ratio Total liabilities Shareholders’ equity Indicates the extent of reliance on creditors, rather than owners, in providing resources = Times interest earned ratio Net income + Interest expense + Taxes Interest expense Indicates the margin of safety provided to creditors

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**Profit Ratios Profit Margin on Sales**

Net Income Net Sales = This ratio indicates the portion of each dollar of revenue that is available to cover expenses. 54 54

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**This ratio measures how well assets have been employed.**

Return on Total Assets Return on Total Assets Net Income Average Total Assets = This ratio measures how well assets have been employed. 55 55

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**Return on Invested Capital**

Profit Ratios Net income Total assets = Return on assets Net Profit Invested Capital = Return on Invested Capital

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**Average Shareholders’ Equity**

Return on Equity Return on Equity Net Income Average Shareholders’ Equity = This ratio measures the ability of management to generate net income from the resources the owners provide. 56 56

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**Receivables Turnover Ratio**

Net Sales Average Accounts Receivable Receivables Turnover Ratio = Whenever a ratio divides an income statement balance by a balance sheet balance, the average for the year is used in the denominator. This ratio measures how many times a company converts its receivables into cash each year. 48 48

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**Days Sales Outstanding or Average Collection Period**

365 Receivables Turnover Ratio Average Collection Period = This ratio is an approximation of the number of days the average accounts receivable balance is outstanding. 50 50

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**Inventory Turnover Ratio**

Cost of Goods Sold Average Inventory Inventory Turnover Ratio = This ratio measures the number of times merchandise inventory is sold and replaced during the year. 50 50

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**Average Days in Inventory**

365 Inventory Turnover Ratio Average Days in Inventory = This ratio indicates the number of days it normally takes to sell inventory. 50 50

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**Basic Earnings Per Share**

*Current period’s cumulative preferred stock dividends (whether or not declared) and noncumulative preferred stock dividends (only if declared). Simple Capital Structure (Basic EPS) Net income (after tax) – Preferred dividends* Weighted average outstanding common stock Number of shares outstanding × Number of months outstanding ÷ Weighted average shares outstanding

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**Shareholder Return Ratios**

Market price per share Earnings per share = Price-Earnings Ratio Dividend per share Market price per share = Dividend Yield

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