Ratio Analysis - Part 5

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From the course by Emory University

Finance for Non-Financial Managers

64 ratings

Emory University

Finance for Non-Financial Managers

64 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

Let's look at your pre-tax margin, also called your EBT margin.

Again, this is a number that's going to be based off of your income statement for

your pre-tax margin.

We're going to look at your pre-tax earnings or

as mentioned, your EBT that's right here.

So for Dell it's 3350 as a ratio of 61494,

so lets do that calculation right here, 3350 over

61494.

Use my handy dandy calculator, 61494

gives me a margin just a little under 5.5.

It's actually 0.0544.

So my EBT margin Is a little bit below my other margin and

you would expect this across the industry and across the sectors.

And so, Hewlett Packard's pre tax margin this period of time is 8.7.

The industry is just over four.

The sector is still hovering right around 7%.

So, we're a little bit better than the industry.

Not quite as good as the sector and we're still not as good as Apple and

HP during this period of time.

Let's look at the net profit margin.

The net profit margin is our net income as a ratio of our total sales.

So here we've got our net income right here,

2635, as a ratio of our total sales, 61494.

So, let me show you how to do this up here.

We've got our net income, 2635, as a ratio

of 61494.

Using my beautiful Emory calculator,

I've got ( 2635 / 61494

) = 0.042 net profit margin.

This means net.

After my costs.

After my operations.

After my tax and my depreciation.

I am generating $4.28 per $100 of sales or

4.28 cents on $1 of sales.

How does this compare?

Unfortunately, Dell is kind of a little bit worse than Apple.

Again, Apple's net profit margin during this period of time was 21 and

HP's net profit margin was 6.9.

But the industries profit margin during the same period of time was just over four

and the sector was just about five.

So, Dell is competitive in the industry sector.

They're definitely behind the ball compared to Apple And HP.

So, what does this mean?

It means for Dell to continue to be competitive,

not only do they might have to decrease cogs.

But they might have to look at their operational strategy in terms of S,

G and A.

Research and development, other operational costs.

They have to consider what their taxes are and how much they pay on taxes.

What their interest expenses are and how much they have to pay for loans.

If they want to drive their margin up, their net profit margin up.

They're going to have to find an area where they can eliminate or

reduce those costs.

Operation, cogs, interest, somewhere.

What I would like you to do is, look at your company or

a company within your industry.

And calculate the gross margin, the operating margin,

the pretax margin, and the net profit margin for your company.

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