RATIO

ANALYSIS

By Jawwad Ahmed Farid

R A T I O A N A L Y S I S

CONTENTS
RATIO ANALYSIS .................................................................................................................................... 5
1. Understanding the Language ............................................................................................................. 5
i. Insolvency ...................................................................................................................................... 5
ii. Fixed & Variable Costs and Cost Functions ................................................................................... 5
iii. Dividends ..................................................................................................................................... 6
iv. Net Working Capital ..................................................................................................................... 6
v. Marketable Securities ................................................................................................................... 6
vi. Debt ............................................................................................................................................. 7
vii. Stakeholders ............................................................................................................................... 8
viii. Managerial Efficiency (ME) ........................................................................................................ 8
ix. Fundamental Analysis .................................................................................................................. 8
2. Introduction to Ratios ........................................................................................................................ 9
i. Ratios Comparative Analysis ....................................................................................................... 9
ii. The many faces of ratio analysis ................................................................................................. 10
3. Liquidity, Leverage, Profitability and Productivity ............................................................................. 11
i. Liquidity ........................................................................................................................................ 11
ii. Leverage ...................................................................................................................................... 12
iii. Productivity ................................................................................................................................ 13
iv. Profitability ................................................................................................................................. 14
CASE STUDY 1 OFFICE DEPOT ................................................................................................................. 15
1. Overview ............................................................................................................................................ 15
2. Financial Condition Review ................................................................................................................ 16
3. Ratios Quick Reviews ...................................................................................................................... 18
Leverage Ratios .................................................................................................................................. 18
Productivity or Turnover Ratios ......................................................................................................... 18
Profitability Ratios .............................................................................................................................. 18
4. Industry review and a first look at ratios ........................................................................................... 19
i. Industry Analysis .......................................................................................................................... 19
ii. Liquidity Ratios ............................................................................................................................ 19
iii. Leverage Ratios .......................................................................................................................... 21
iv. Productivity Ratios ..................................................................................................................... 23
v. Profitability Ratios ....................................................................................................................... 26
CASE STUDY 2 STAPLES & OFFICE DEPOT: COMPARATIVE RATIO ANALYSIS ...................................................... 30
1. Staples Overview ............................................................................................................................. 30
2. Financial Condition Review ................................................................................................................ 30
3. Liquidity Ratios - Comparison ............................................................................................................ 31
i. Current Ratio ................................................................................................................................ 32
ii. Quick Ratio .................................................................................................................................. 33
4. Leverage Ratios .................................................................................................................................. 33
i. Debt to Equity Ratio ..................................................................................................................... 33
ii. Debt to Total Assets .................................................................................................................... 35
iii. Times Interest Earned (Coverage) Ratio .................................................................................... 35
iv. Fixed Charge Coverage Ratio ..................................................................................................... 36

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R A T I O A N A L Y S I S

v. Productivity Ratios ...................................................................................................................... 36

5. Profitability Ratios .............................................................................................................................. 39
i. Gross Profit Margin ...................................................................................................................... 40
ii. Operating Profit Margin .............................................................................................................. 41
iii. Net Profit Margin ....................................................................................................................... 41
iv. Return on Assets (ROA) .............................................................................................................. 42
v. Return on Equity (ROE) ............................................................................................................... 43
vi. Basic Earning Power Ratio .......................................................................................................... 43
Conclusion ................................................................................................................................................. 43
DISCLAIMER .......................................................................................................................................... 45

Please do not photocopy or distribute without permission. All rights reserved Alchemy Software Pvt Limited.
http://FourQuants.com
Page 4 of 45