Ratio Analysis - Part 3

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From the course by Emory University

Finance for Non-Financial Managers

40 ratings

Emory University

Finance for Non-Financial Managers

40 ratings

Finance is for “Non-financial Managers” who want to understand key financial principles and apply them in a real-world context. Over the course of the program window, you will work your way through a series of nine modules that move from understanding basic financial principles to applying financial analysis and ratios to drive decisions. In addition, each module is capped with an ending self-evaluation to ensure that you have absorbed the following key learning objectives: + Understand the language associated with finance + Know how and when to use financial terms and analysis techniques + Read and assess company performance using financial statements + Recognize the link between organizational strategy and financial objectives + Use "the numbers" to your best advantage to make more informed decisions

From the lesson

Financial Statement Analysis

This module will explain ratio analysis.

Ratio Analysis - Part 18:45

Ratio Analysis - Part 27:50

Ratio Analysis - Part 35:28

Ratio Analysis - Part 47:40

Ratio Analysis - Part 55:13

Meet the Instructors

Thomas Smith
Assistant Professor in the Practice of Finance
Goizueta Business School

All right, let's look at some of our debt ratios.

So the two debt ratios we're going to look at here are our debt ratio and

our debt equity ratio.

Our debt ratio is the total amount of debt that we have relative

to our assets, and our debt equity ratio

is the total amount of debt that we have to our total owner's equity.

Both of these things tell you what we owe relative to what we own.

And what we owe relative to our own ownership.

There are ways of identifying whether or not we're solvent and

how it is that we actually manage our debt.

So let's look at a couple of these things.

Let's start with our debt ratio.

As mentioned, the debt ratio is the total debt to our total assets.

Recall, we're still going to use the balance sheet to identify our debt.

So we can identify our total debt as the difference between our total assets and

our total owner's equity or our total liabilities here.

So here's our total debt right there.

It's the total liabilities that we have.

30,833 and our total

assets here, 38,599.

So our debt ratio is total

liabilities here 30,833

divided by 38,599.

So again, my handy dandy four function calculator.

30,833 divided by

38,599 gives me 0.79.

But this means that we have $0.79 in debt for every dollar that we have in assets.

Is this good or is this bad?

The same period of time we can look at what's going on in industry,

what's going on in the sector, what's going on in the S&P,

and identify whether we are stronger or weaker relative to our competitors.

We're nearly comparable during the same period of time to both the industry and

the sector.

And we're doing a little bit better than the S&P

in our debt asset ratio, or our debt ratio.

Let's look at our debt to equity ratio.

For this one, we're going to look at our total debt.

But instead of looking at our assets,

we're going to look at that relative to our total equity here.

So we've got

30833 as a ratio

of 7766.

So I take my handy dandy calculator,

it is handy, it is dandy,

and I get 0.97.

So that means I have almost $4 in debt to

every dollar that I have in equity.

Is this good, is this bad?

During the same period of time the industry was operating at about 4.6,

the sector was a little bit lower at about 2.6,

the S&P was a lot lower, one and change.

So what's happening is we're a little bit better.

The amount of debt that we have relative to our equity

is a little bit higher than other elements in the S&P, but we're more or

less on target with respect to where we are in the sector and the industry.

We might want to look at some different competitors,

we might want to look at what the goals are.

And taking on liabilities as an organization is not inherently bad,

if they lead to asset accumulation, they can lead to the sales.

Of course we're going to get to that, as well.

Here's what I would like you to do.

I would like you to try to calculate the debt ratio and the debt to

equity ratio for your own company, or a company in your same industry.

Grab the balance sheet, try these calculations out, and

see if you can interpret what the number means.

Next, were going to look at some profit ratios.

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