Ratios, financial

The sports and business worlds use statistics as a measure of performance. There are many financial ratios of interest to financial analysts. A summary of the definitions of financial ratios used in this text along with CPI average values is found in Table 3.14. Only the following common financial ratios are presented in this section  

Liquidity ratios a measure of a company s ability to pay its short-term debts when due 

Leverage ratios a measure of a company s overall debt burden Activity ratios a measure of how effectively a company manages its assets Profitability ratios an indication of a firm s total operating performance, which is a combination of asset and income management 

Two measures of a company s liquidity are the current ratio and the cash (quick) ratio. 

The current ratio is defined as the current assets divided by the current liabilities. It is a measure of the company s overall ability to meet obligations from current assets. Today a comfortable level of between 1.5 and 2 is considered adequate. (Note Numbers presented in this section are typical as of 1999 but will vary depending on the company s style of management.) 

Although the information in this chapter is highly technical, it lays the foundation for operations and supply chain managers to develop a greater understanding of how their role influences a company s finances. The financial ratios discussed next are the ratios that interest executives and investment community. These common ratios have long been used by financial ejqjerts and provide meaningful, useful. 

Financial ratios calculated from financial statements primarily fall into the following five categories  

Refer to PepsiCo balance sheet (Table 4.2) and PepsiCo income statement (Table 4.3) as the financial ratio calculations are explained. 

Liquidity ratios are used to identify whether or not a company can meet its short-term obligations. For instance, can the company pay its bills in the coming year Can the company pay its suppliers Can it pay its employees Because this is related to paying off debts 

Current ratio = Current assets/Current liabilities = 22,203/ 17,839 = 1.24 times 

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Financial Ratios Probably the most commonly mentioned ratio is the profit margin (PM), defined as... 

Table 9-6 shows the financial ratios for Tables 9-3 and 9-4. Table 9-7 is a summary of selected financial ratios and industry averages. 

In financial matters, a similar technique, ratio analysis, is used to judge whether a company is healthy witli respect to industry standards. In ratio analysis most of die quantities compared are quantities of money, so the ratio of one quantity of money to another quantity of money is, by definition, a new dimensionless ratio (like die Reynolds number or lift coefficient), and these financial ratios can be used to compare businesses in similar industries or businesses (in engineering, such comparison is referred to as dynamic similitude). 

Describe the utility of financial ratios and interpret basic financial ratios used in community pharmacy practice. 

Organizations, investors, creditors, and even individuals use financial ratios to examine an organizations financial performance. Some financial ratios, such as net income/average total assets, provide useful information on the profitability of the organization. Other ratios can be calculated that provide insight into the liquidity of the organization (how much cash is available to pay the bills) or how well the organization... 

Financial ratio analysis is only as valid as the financial information on which it is based. If the information provided in the financial statements hasn t been independendy verified (audited), the results of a financial ratio analysis are not likely to give the reader an accurate assessment of the financial performance of that organization. While financial ratio analysis can provide valuable insight to the performance of any organization, it is important that the users of financial ratios are also mindful of their limitations ... 

Financial ratios should be compared to a reference point (such as historical values of the same company). 

When calculating financial ratios at the end of each quarter, keep in mind seasonal factors that may distort the ratio. Firms use different, accepted accounting methods to prepare their balance sheet and income statement. Therefore, it is imperative to understand how the values used in calculating the ratios were obtained. 

Financial ratios are classified according to the information they provide. Table 15-6 provides a fist of selected financial ratios used in various pharmacy settings. Different ratios give different pictures of the company s performance and serve different analytical needs. Profitability ratios, liquidity ratios, and turnover ratios are described below. For further discussion of other financial report ratios please refer to Stickney (1999). 

Financial reports used in independent pharmacy practice are very similar to those used in chain community pharmacies. Managers in chain community pharmacies pay attention to the same financial ratios and key indicators on balance sheets and income statements. It was with this knowledge that Marco and Diana decided to spend some time with WHP s owner to gain more insight into the preparation and review of financial reports in community pharmacy practice. 

Finally, the director of pharmacy pays special attention to external financial reports. Professional associations such as the American Hospital Association and the American Society for Health-System Pharmacists publish reports that show the national trends in pharmaceutical expenditures and labor productivity in hospitals (American Hospital Association, 2007 Hoffman et ah, 2005). Pharmacy managers can gauge the efficiency of their operations by comparing their financial ratios and other indicators with national averages. 

Case 1. A completely new business is assumed with financial ratios of working capital plus inventory at 29% of sales, and plant plus equipment at cost as 42% of sales. 

Activity ratios are measures of how effectively a company manages its assets. They are based on the assumption that there are proper relationships between a company s assets and the sales and income that the assets generate. Different methods are used to generate these ratios, and they depend on how a person wants to use the ratios. Most analysts compile average ratios from balance sheet data, which are end-of-year data. In this section and in the financial ratio example that follows, this method is used. 

The financial ratios for Ai chem are found in Table 3.15. If these are compared with the CPI averages found in Table 3.14, one can draw the following conclusions ... 

Financial ratios often used by analysts were introduced because they are indicators of how well the company uses its assets and how well management performs. An equation for determining the Z score was introduced. It measures how the position of a company with respect to the brink of bankruptcy. 

Chai les Kyd, Calculating Financial Ratios, Lotus, January 1987, pp. AA-Al. 

Two major financial considerations of importance to any business are profitability and capital structure. As noted in Chapter 5, some companies in the CPI generate a tremendous flow of cash and profit. To see the significance of these companies, examine their financial ratios and compare them with those of vari-... 

SIC classifications Officers and directors Corporation profile Comparative company financial ratios/data... 

Chapter 3 was completely revised to reflect current practice with respect to accounting and financial reporting. The accounting example for Delchem Corporation was shortened, and financial reporting and financial analysis were augmented and updated. Financial ratios were presented and applied to Archem operations. Finally, a Z-score indicator that determines the potential for bankruptcy was introduced and also applied to Archem. Excerpts from Monsanto s 1994 annual report were included to illustrate a real-world annual report. 

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