Introduction

1. Introduction • A financial ratio shows the relationship between two financial measures • Developed by dividing one measure into another • Provide insights into company’s operations and strategy • Four categories: liquidity, solvency, market value, profitability • Used internally to evaluate performance and set goals • Used externally to make investment decisions

2. Asset Turnover “Reveals how effective assets are at generating sales revenue.” sales assets Asset Turnover =

3. Return on Sales “ROS indicates the percentage of each sales dollar that results in net income.” net profit net sales Return on Sales =

4. Return on Assets “ROA measures a company’s ability to use all its assets to generate earnings.” net profit assets Return on Assets =

5. Leverage “Leverage shows the debt level of the organization.” assets equity Leverage =

6. Return on Equity “Return on Equity highlights for the stockholders the return on their investment.” net profit equity Return on Equity =

7. Du Pont Formula net profit equity Return on Equity = net profit sales sales assets assets equity x x

8. net profit equity Return on Equity = net profit sales sales assets assets equity x x Du Pont Formula

9. Du Pont Formula net profit equity Return on Equity = net profit sales sales assets assets equity x x Return on Sales Asset Turnover Leverage

10. Du Pont Formula · TI vs. HP Current Assets = 1.29 Fixed Assets = 1.11 Sales = 4.07 Net Income = .37 Shareholder Equity = 1.16 Hewlett Packard Texas Instruments

11. Du Pont Formula · TI vs. HP Current Assets = 1.29 Fixed Assets = 1.11 Sales = 4.07 Net Income = .37 Shareholder Equity = 1.16 Turnover x 1.69 ROS 9.3% = ROA 15.7% x Leverage 2.07 = ROE 32.5% Hewlett Packard Texas Instruments

12. Du Pont Formula · TI vs. HP Current Assets = 1.49 Fixed Assets = .84 Sales = 3.09 Net Income = .52 Shareholder Equity = 1.54 Current Assets = 1.29 Fixed Assets = 1.11 Sales = 4.07 Net Income = .37 Shareholder Equity = 1.16 Turnover x 1.69 ROS 9.3% = ROA 15.7% x Leverage 2.07 = ROE 32.5% Hewlett Packard Texas Instruments

13. Du Pont Formula · TI vs. HP Current Assets = 1.49 Fixed Assets = .84 Sales = 3.09 Net Income = .52 Shareholder Equity = 1.54 Current Assets = 1.29 Fixed Assets = 1.11 Sales = 4.07 Net Income = .37 Shareholder Equity = 1.16 Turnover x 1.69 ROS 9.3% = ROA 15.7% x Leverage 2.07 = ROE 32.5% Turnover x 1.33 ROS 16.9% = ROA 22.4% x Leverage 1.52 = ROE 33.8% Hewlett Packard Texas Instruments

14. Porter Curve High ROI Low High Market Share

15. Porter Curve High ROI Low High Market Share

16. Porter Curve High ROI Low High Market Share