In the part of this chapter, I’ll make clean some ratios, such as Current Ratio , Total Debt Ratio, Inventory Turnover…… All of these ratios are necessary to financial analysis.

There are two primary tools in financial analysis:

·Ratio analysis – to assess（评价） how various line items in financial statements relate to each other and to measure relative performance.

·Cash flow analysis – to evaluate liquidity and the management of operating, investing, and financing activities as they relate to cash flow.

In this chapter we will mainly introduces ratio analysis.

As we all known, profitability and growth drive firm value. Managers can employ four levers to achieve growth and profit targets:

1. Operating management 2. Investment management

3. Financing strategy 4. Dividend policy（股息分配方针）

Then ratio analysis seeks to evaluate the firm’s effectiveness in these areas.

Ratio Analysis

·Evaluating ratios requires comparison against some benchmark（基准）. Such benchmarks include:

– Ratios over time from prior periods (time series)

– Ratios of other firms in the industry (cross-sectional)

– Some absolute benchmark

·Effective ratio analysis must attempt to relate underlying business factors to the financial numbers （有效的财务分析必须联系相关的财务要素来分析财务数字）and we use ratios to analysis the company’s solvency（偿债能力）、Operating Capacity（营运能力）、generating capacity/ Profitability（获利能力）

Financial Leverage Analysis

·Borrowing allows a firm to access to capital, but increases the risk of ownership for equity holders.

·Analysis of leverage can be performed on both short- and long-term debts:

1. Liquidity analysis relates to evaluating current liabilities。

2. Solvency analysis relates to longer term liabilities。

Liquidity Analysis（Short-term solvency analysis短期偿债能力）

• There are several ratios useful to evaluate a firm’s liquidity, including:

– Current ratio

– Quick ratio

– Cash ratio

– Operating cash flow ratio

• Each of these ratios attempts to measure the ability of a firm to pay its current obligations.

• Knowing how the liquidity ratios are calculated allows the user to understand how to interpret解释 them:

①Current ratio = Current assets / Current liabilities

Current ratio also called Working Capital Ratio（营运资金比率）

②Quick ratio = Cash + Short-term investments + Accounts. receivable

Current liabilities

This ratio also called Acid test.

Here, I need to explain quick ratio. First, quick access refer to the current assets minus the inventory that cash flow ability is bad and unstable, prepaid receivable, a maturity of non-current assets（一年内到期的非流动资产） and other current assets. Quick access include cash, short term investment, and receivable（应收票据） and accounts receivable (less the loss of bad), prepaid receivable, other receivables（其他应收款）, etc

The current ratio and quick ratio is a reflection of the enterprise short-term solvency index. Generally speaking, the two ratio is high, the enterprise assets that the stronger ability of cash and short-term debt paying ability also is stronger; Otherwise, the weak. Generally thinking that current ratio should be in the 2:1 above, quick ratio should be at 1:1 above. The current ratio 2:1,means that current assets is two times of current liabilities, even if the current assets have half in the short term not realizable, also can ensure that all of the current liabilities be paid back. Quick ratio 1:1,means that quick assets has sold instant cash ability equal liquid liability，at any time to pay all current liabilities. But we should know that the two ratios are not the higher the better. The current ratio is too high, which is current assets relative to the current liabilities too much, may be the backlog inventories, also may be too much cash held. All of these are not we would like to see. 一般说来，这两个比率越高，说明企业资产的变现能力越强，短期偿债能力亦越强；反之则弱。一般认为流动比率应在2：1以上，速动比率应在1：1以上。流动比率2：1，表示流动资产是流动负债的两倍，即使流动资产有一半在短期内不能变现，也能保证全部的流动负债得到偿还；速动比率1：1，表示现金等具有即时变现能力的速动资产与流动负债相等，可以随时偿付全部流动负债。应当说明的是，这两个比率并非越高越好。流动比率过高，即流动资产相对于流动负债太多，可能是存货积压，也可能是持有现金太多，或者两者兼而有之；速动比率过高，即速动资产相对于流动负债太多，说明现金持有太多。企业的存货积压，说明企业经营不善，存货可能存在问题；现金持有太多，说明企业不善理财，资金利用效率低下。

·Current Ratio = CA / CL

1,553,725 / 1,525,453 = 1.02 times

·Quick Ratio = (CA – Inventory) / CL

(1,553,725 – 295,225) / 1,525,453 = 0.825 times

We could see that current ratio is too low, there will not enough money for the liability. The quick ratio is we can accept.

③Cash ratio = Cash + Marketable securities

Current liabilities

This ratio reflects the company’s cash ability. Here said the cash, it is to point to cash and cash equivalents. We generally think cash ratio should be in the 20% above. But the rate is too high, means that company’s current liabilities failed to get the reasonable application.

From the sample， Cash Ratio = Cash / CL 6,489 / 1,525,453 = .004 times

The cash ratio is only 4%. It’s means that the enterprise did not enough cash to pay back the current liabilities.

Leverage Ratios（Long-term solvency analysis长期偿债能力）

①Total Debt Ratio（资产负债率） =total liability / total asset

We also could say this ratio debt ratio. The Total Debt Ratio reflects the total assets of enterprises in the share of debt to get through. This ratio is higher, the ability of the enterprise to repay the debt is poor; Conversely, the stronger ability to repay the debt.资产负债率反映的是企业资产中有多少是通过举债获得的，这个比率越高，企业的偿债能力越差，反之，越强。50% is more appropriate。

Total Debt Ratio = (TA – TE) / TA

(4,088,797 – 1,691,493) / 4,088,797 = .5863 times or 58.63%

The firm finances almost 59% of their assets with debt

Debt/Equity = TD / TE（产权比率）

This ratio is another kind of form of debt ratio. The change of this ratio is in the same direction with debt ratio.

This ratio can reflect the relationship between the creditors’ cash and shareholders’ money.we could see if the enterprise basic financial structure is stable through this ratio. Enterprises of long-term debt repayment ability is higher if the ratio is lower, if not is higher。该指标表明由债权人提供的和由投资者提供的资金来源的相对关系，反映企业基本财务结构是否稳定。产权比率越高，说明企业偿还长期债务的能力越弱；产权比率越低，说明企业偿还长期债务的能力越强。

②Debt/Equity = TD / TE

● (4,088,797 – 1,691,493) / 1, 691,493 = 1.417 times

● Equity Multiplier （权益乘数）= TA / TE = 1 + D/E

Equity Multiplier is bigger, it shows that the enterprise debt is more, financial risk is bigger. 权益乘数较大，表明企业负债较多，财务风险较大。

● Equity Multiplier = TA / TE = 1 + D/E

● 1 + 1.417 = 2.417

The company Operation ability analysis（营运能力分析）

①Inventory Ratios（存货周转率）

● Inventory Turnover = Cost of Goods Sold / Inventory 销售成本/平均存货

We could get ‘‘Cost of Goods Sold’’ from income statement。 The inventory is average inventory . we could calculated it from balance sheet. That ratio illustrate in certain period of inventory cycle times. And Measure the enterprise’ sales ability. 存货周转率说明了一定时期内存货周转的次数，可以用来测定企业存货的变现速度。In generally，We hope to see the rate low but not high.

● Days’ Sales in Inventory = 365 / Inventory Turnover（存货周转天数）

The Days’ Sales in Inventory said a need inventory turnover of time. The shorter the days that the inventory faster.（存货周转天数表示存货周转一次所需要的时间，天数越短说明存货周转的越快）

The same we can analyze②Receivables Ratios（应收账款周转率）include

Receivables Turnover = Sales / Accounts Receivable

Days’ Sales in Receivables = 365 / Receivables Turnover which ratio reflect the company’s accounts receivable.

And③Total Asset Turnover（总资产周转率）

● Total Asset Turnover = Sales / Total Assets

We could use this ratio to Measure of asset use efficiency。We usually use the TAT compared with 1，but

● Not unusual for TAT < 1, especially if a firm has a large amount of fixed assets（总资产周转率并不总是小于1 的，尤其是这个企业有很大数量的固定资产）

The sales in this formula we should use net sales income。

Net sales income = sales revenue-sales return-sales allowances折让-sales discount折扣

If there is lower percentage of this ratio, the total assets have not been fully used，and Enterprise should take measures to improve the efficiency of using the assets.（如果比率过低，资产没有得到充分利用，企业应该采取措施提高资产的使用效率）

The last way of ratio analysis，we use these ratio to analysis the company’s Profitability。These ratios conclude :

● Profit Margin = Net Income / Sales（销售净利率）

We could use this ratio to evaluate the Profitability of the enterprise through sales。

As the sample，we can see this company could get $10.67 through every $100 revenue.

● Return on Assets (ROA) = Net Income / Total Assets（资产报酬率）

We could use this ratio to evaluate the Profitability of the enterprise through assets。

As the sample，we can see this company could get $10.41 through every $100 assets.

● Return on Equity (ROE) = Net Income / Total Equity（股东权益报酬率，净资产收益率）

This ratio could reflect the level of the Enterprise’s shareholders obtain the reward of investment .（企业股东获取投资报酬的高低）。The higher it is，the stronger Profitability has。

Now the last important ratio is

● PE Ratio = Price per share / Earnings per share 市盈率=每股市价/每股利润

Investors attach great importance to this ratio,and this ratio is an important reference for one of the factors for the investors making the investment decision.投资者非常重视这个比率，这一比率是投资者做出投资决策的重要参考因素之一。Generally speaking，the higher ratio means that investors full of hope to the development of the company，and they are willing to pay a high price to buy the stock of the company，so the PE ratio of some Growth good high-tech company’s stock usually higher than others.一般来说，市盈率高，说明投资者对公司的发展前景看好，愿意出较高的价格购买该公司的股票，所以一些成长性较好的高科技公司的股票的市盈率要高于其他公司。But we should attention that higher PE ratio means more investment risk.

As the sample ，it’s PE ratio is 28.4，this enterprise’s shareholders have more investment risk than others.