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Words 667

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Sharpe Ratio and Information Ratio used to determine the risk-adjusted return of an investment portfolio.

Sharpe Ratio

The Sharpe Ratio introduced a method of assessing manager performance relative to risk taken. Sharpe Ratio centres on the use of a RFR, this places all mangers on a level playing field regardless of style.

(Expected Portfolio Return – RFR) / Portfolio Standard Deviation

Hypothetically, investors should always be able to invest government bonds and obtain the RFR. The sharpe ratio determines the expected realized return over that minimum. Within the risk-reward framework of portfolio theory, higher risk investment should produce high returns. As a result, a high Sharpe ratio indicates superior risk adjusted performance.

Sharpe ratio measures a portfolio’s added value relative to its total risk. (A portfolio of risk free assets or one with an excess return of zero would have a Sharpe ratio of zero.) Sharpe ratio was based on portfolio theory, it is designed to be applied to investment strategies that have normal expected return distributions, it is not suitable for measuring investments that are expected to have asymmetric returns.

Information Ratio

(Portfolio Return – Benchmark Return) / Tracking Error or Active Return/Active Risk

(Portfolio Return – Benchmark Return) referred to as the active return. The IR uses the SD of active returns as a measure of risk instead of the SD of the portfolio.

It measures the manager’s excess return over an appropriate benchmark relative to the SD of those excess returns. By computing risk on a relative return basis, the IR effectively eliminates market risk, showing only risk taken from active management. Therefore, in one simple number, the IR shows how a manger has performed per unit of active risk taken.

Shortcomings of IR

The…...

...A Summary of Key Financial Ratios How They Are Calculated and What They Show Profitability Ratios 1. Gross profit margin Sales - Cost of goods sold Sales An indication of the total margin available to cover operating expenses and yield a profit. 2. Operating profit margin (or Return on Sales) Profits before taxes and interest Sales An indication of the firm's profitability from current operations without regard to the interest charges accruing from the capital structure 3. Net profit margin (or net Return on sales) Profits after taxes Sales Shows after tax profits per dollar of sales. Subpar profit margins indicate that the firm's sales prices are relatively low or that costs are relatively high, or both. 4. Return on total Assets Profits after taxes Total assets or Profits after taxes + interest Total assets A measure of the return on total investment the enterprise. It is sometimes desirable to add interest to after tax profits to form the numerator of the ratio since total assets are financed by creditors as well as by stockholders; hence, it is accurate to measure the productivity of assets by the returns provided to both classes of investors. 5. Return on stockholder's equity (or return on net worth) Profits after taxes Total stockholders' equity A measure of the rate of return on stockholders' investment in the enterprise. 6. Return on common equity (Profits after taxes -Preferred stock dividends) (Total stockholders" equity - Par value of preferred......

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...[pic] ANALYSIS OF FINANCIAL STATEMENTS OF HOTEL LEELA VENTURES TABLE OF CONTENTS :: 1) INTRODUCTION TO HOTEL INDUSTRY 2) PROFILE OF HOTEL LEELA VENTURES LTD. 3) OBJECTIVE OF ANALYSIS AND METHODOLOGY 4) FINANCIAL ANALYSIS USING RATIO ANALYSIS 5) INTERPRETATIONS OF THE RATIOS 6) RECOMMENDATIONS 7) REFERENCES INTRODUCTION TO HOTEL INDUSTRY Over the last decade and half the mad rush to India for business opportunities has intensified and elevated room rates and occupancy levels in India. Even budget hotels are charging USD 250 per day. The successful growth story of 'Hotel Industry in India' seconds only to China in Asia Pacific. 'Hotels in India' have supply of 110,000 rooms. According to the tourism ministry, 4.4 million tourists visited India last year and at current trend, demand will soar to 10 million in 2010 – to accommodate 350 million domestic travelers. 'Hotels in India' has a shortage of 150,000 rooms fueling hotel room rates across India. With tremendous pull of opportunity, India is a destination for hotel chains looking for growth. The World Travel and Tourism Council, India, data says, India ranks 18th in business travel and will be among the top 5 in this decade. Sources estimate, demand is going to exceed supply by at least 100% over the next 2 years. Five-star hotels in metro cities allot same room, more than once a day to different guests, receiving......

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...The most comprehensive form of gearing ratio is one where all forms of debt - long term, short term, and even overdrafts are expressed as a percentage of the total assets of the company.The calculation is as follows: * Long-term debt + Short-term debt + Bank overdrafts X 100 Shareholders' equity+Long-term debt + Short-term debt + Bank overdrafts Sainsbury’s gearing ratio for 2013 was 55% compared to 67% for Tesco. This meet that out of every £1 of the assets of Sainbury, 55 pence is financed by debt compared to 67 pence for Tesco. The interest cover ratio demonstrates the relationship between the amount of operating profit available to cover interest payable. More importantly it demonstrates the maximum number of times the operating profit can decrease to still cover the interest payable. The lower the interest cover, the greater the risk for creditors that they will not be paid and the greater the risk to shareholders that creditors will take action. Sainsbury’s levels of operating profit are much higher than the interest payable. This means that if the operating profit shrank 8.9 times, the interest payable would be still covered. The interest cover for Teco is 9.5 times which means that even if the profits must decreased by 9.5 times it will still be able to service its debt. We are assuming of course that the debt are at a fixed interest and is not subject to interest rate variation. It seems that both company have a good gearing percentage and more......

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...Activities Ratios | 2012 | 2011 | 2010 | Total Current Asset | 11,267,000 | 4,604,000 | 2,246,000 | Net Receivables | 1,170,000 | 547,000 | 373,000 | Inventory | - | - | - | Total Asset | 15,103,000 | 6,331,000 | 2,990,000 | Total Liability | 3,348,000 | 1,432,000 | 828,000 | Total Shareholder's Equity | 11,755,000 | 4,899,000 | 2,162,000 | Total Revenue | 5,089,000 | 3,711,000 | 1,974,000 | Cost of Good Sold | 1,364,000 | 860,000 | 493,000 | Gross Profit | 3,725,000 | 2,851,000 | 1,481,000 | Average Total Asset | 10,717,000 | 4,660,500 | | Average Account Receivable | 858,500 | 460,000 | | Asset Turnover | 0.47 | 0.80 | | Inventory Turnover | - | - | | Days in Inventory | - | - | | Account Receivable Turnover | 5.93 | 8.07 | | Days in Receivable | 61.57 | 45.24 | | | Industry 2012 | FB Co. 2012 | FB Co. 2011 | Asset Turnover (H) | 1.04 | 0.47 | 0.8 | Inventory Turnover | 213.45 | - | - | Days in Inventory | 1.71 | - | - | Receivable Turnover (H) | 4.47 |......

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... | |Working Capital is more a measure of cash flow than a ratio. The result of this calculation must be a positive number. It is calculated | |as shown below: | |Working Capital = Total Current Assets - Total Current Liabilities | |Bankers look at Net Working Capital over time to determine a company's ability to weather financial crises. Loans are often tied to | |minimum working capital requirements. | |Accounting Ratios and its utility | |A relationship between various accounting figures, which are connected with each other, expressed in mathematical terms, is called | |accounting ratios. | |According to Kennedy and Macmillan, "The relationship of one item to another expressed in simple mathematical form is known as ratio." | |Robert Anthony defines a ratio as – "simply one number expressed in terms of another." | |Accounting ratios are very useful as they briefly summarise the result of......

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...Gearing Ratio: The ratio measures the level of indebtedness of the company against the company’s equity.PG is highly geared having slided by 37% to 79% in year 2012 compared to 42% in year 2011. Debenture holders finance 79% of the company’s equity leaving the shareholders with only 21%. The implications of high gearing at Mazuru Company is that it is increasing the cost of borrowing ( Finance charges) thereby affecting profitability. If the trend continues and the company fails to pay up the debt, the debenture holders may end up taking over the ownership of the company. Return on Investment: The ratio measures the capacity of the investment to generate profit. The company has been making net losses since 2011 of $1,2 million and $0,9 Million in 2012 hence there was no return on shareholders’ investment. There is a threat of that the company may fail to continue to operating as a going concern if the trend continues. Liquidity Ratio: This ratio measures the entity’s ability to cover its current liabilities from available current assets. A current ratio of 1:1 is considered fair. MC has liquidity challenges as its current liabilities exceed its current assets .The situation has not improved since year 2011 (0:0.58) to current year under review -2012 (0:0.48) Of the total current liability, only 48% can be covered and the rest will not be paid. The company is unable to pay its short-term obligations and may fail to procure trading stock .The......

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...INTRODUCTION OBJECTIVE: To understand the information contained in financial statements with a view to know the strength or weaknesses of the firm and to make forecast about the future prospects of the firm and thereby enabling the financial analyst to take different decisions regarding the operations of the firm. RATIO ANALYSIS: Fundamental Analysis has a very broad scope. One aspect looks at the general (qualitative) factors of a company. The other side considers tangible and measurable factors (quantitative). This means crunching and analyzing numbers from the financial statements. If used in conjunction with other methods, quantitative analysis can produce excellent results. Ratio analysis isn't just comparing different numbers from the balance sheet, income statement, and cash flow statement. It's comparing the number against previous years, other companies, the industry, or even the economy in general. Ratios look at the relationships between individual values and relate them to how a company has performed in the past, and might perform in the future. MEANING OF RATIO: A ratio is one figure express in terms of another figure. It is a mathematical yardstick that measures the relationship two figures, which are related to each other and mutually interdependent. Ratio is express by dividing one figure by the other related figure. Thus a ratio is an expression relating one number to another. It is simply the......

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...Ratios and Formulas in Customer Financial Analysis Financial statement analysis is a judgmental process. One of the primary objectives is identification of major changes in trends, and relationships and the investigation of the reasons underlying those changes. The judgment process can be improved by experience and the use of analytical tools. Probably the most widely used financial analysis technique is ratio analysis, the analysis of relationships between two or more line items on the financial statement. Financial ratios are usually expressed in percentage or times. Generally, financial ratios are calculated for the purpose of evaluating aspects of a company's operations and fall into the following categories: * liquidity ratios measure a firm's ability to meet its current obligations. * profitability ratios measure management's ability to control expenses and to earn a return on the resources committed to the business. * leverage ratios measure the degree of protection of suppliers of long-term funds and can also aid in judging a firm's ability to raise additional debt and its capacity to pay its liabilities on time. * efficiency, activity or turnover ratios provide information about management's ability to control expenses and to earn a return on the resources committed to the business. A ratio can be computed from any pair of numbers. Given the large quantity of variables included in financial statements, a very long list of meaningful ratios can be......

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...DEFINITION OF 'SOLVENCY RATIO'A key metric used to measure an enterprise’s ability to meet its debt and other obligations. The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-term and long-term liabilities. The lower a company's solvency ratio, the greater the probability that it will default on its debt obligations. The measure is usually calculated as follows: Solvency ratio, with regard to an insurance company, means the size of its capital relative to the premiums written, and measures the risk an insurer faces of claims it cannot cover. The solvency ratio is only one of the metrics used to determine whether a company can stay solvent. Other solvency ratios include debt to equity, total debt to total assets, and interest coverage ratios. However, the solvency ratio is a comprehensive measure of solvency, as it measures cash flow – rather than net income – by including depreciation to assess a company’s capacity to stay afloat. It measures this cash flow capacity in relation to all liabilities, rather than only debt. Apart from debt and borrowings, other liabilities include short-term ones such as accounts payable and long-term ones such as capital lease and pension plan obligations. Measuring cash flow rather than net income is a better determinant of solvency, especially for companies that incur large amounts of depreciation for their assets but have low levels of actual profitability. Similarly, assessing a company’s ability...

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...Examples of Questions on Ratio Analysis A: Multiple Choice Questions 1. Which of the following is considered a profitability measure? a. Days sales in inventory b. Fixed asset turnover c. Price-earnings ratio d. Cash coverage ratio e. Return on Assets 2. Firm A has a Return on Equity (ROE) equal to 24%, while firm B has an ROE of 15% during the same year. Both firms have a total debt ratio (D/V) equal to 0.8. Firm A has an asset turnover ratio of 0.9, while firm B has an asset turnover ratio equal to 0.4. From this we know that a. Firm A has a higher profit margin than firm B b. Firm B has a higher profit margin than firm A c. Firm A and B have the same profit margin d. Firm A has a higher equity multiplier than firm B e. You need more information to say anything about the firm's profit margin 3. If a firm has $100 in inventories, a current ratio equal to 1.2, and a quick ratio equal to 1.1, what is the firm's Net Working Capital? a. $0 b. $100 c. $200 d. $1,000 e. $1,200 4. To measure a firm's solvency as completely as possible, we need to consider a. The firm's relative proportion of debt and equity in its capital structure b. The firm's capital structure and the liquidity of its current assets c. The firm's ability to use Net Working Capital to pay off its current liabilities d. The firms leverage and its ability to make interest payments on its long-term debt e. The firm leverage and its ability to turn its assets over into...

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...after 2012. One of its policies stated that, if the completion of works is 20%, we only recognize it into financial statement in sales. X In 2012, goods in progress in 2011 will be fully paid by customers after completion. Thus, the incurred amount will be recognize in 2012 after the completion. Asset turnover * Reduce * Bad * Capital employed increase more than sales * There are chges in the capital employed in 2012 due to Alberto Blanc (held the roles of Chairman and Chief Executive) In November 2012, the floatation issued 120 new shares. * Borrowing increases. * It’s bad because the unable to generate more sales in 2012. Not fully utilized. * However, the issued period in only two month, thus the accuracy of the information is not accurate, not reasonable to compare two months to 1 whole year. But in 2013 or future, the company’s capital employed might be more efficient and able to generate more sales in the future. * Future plan, maybe due to expansion of store Return on Capital Employed * Reduce * Bad * Margin increase but asset turnover, reduce significantly * Capital too much in November but unable to generate more cash in such short notice Liquidity * Increase * Good * CA more than CL * Cash increase in 2012. Because they in issued in new share and increase the borrowing in nov 2012. * CL also reduce due to the payback the bank overdraft * Use borrowing to pay back bank overdraft due to lower interest rates. *......

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...10 RATIOS YOU MUST KNOW Liquidity Ratios Current (working capital) ratio Acid-test (quick) ratio – Cash flow liquidity ratio Accounts receivable turnover Number of days’ sales in accounts receivable Inventory turnover – Total assets turnover 651 10 RATIOS YOU MUST KNOW Equity (Long-Term Solvency) Ratios Equity (stockholders’ equity) ratio – Equity to debt 10 RATIOS YOU MUST KNOW Profitability Tests – Return on operating assets Net income to net sales (return on sales or “profit margin”) $ Return on average common stockholders’ equity (ROE) – Cash flow margin Earnings per share – Times interest earned – Times preferred dividends earned 10 RATIOS YOU MUST KNOW Market Tests – Earnings yield on common stock Price-earnings ratio – Payout ratio on common stock – Dividend yield on common stock – Dividend yield on preferred stock – Cash flow per share of common stock Now, let’s look at Norton Corporation’s 1999 and 1998 financial statements. NORTON CORPORATION Balance Sheets December 31, 1999 and 1998 1999 Assets Current assets: Cash Accounts receivable, net Inventory Prepaid expenses Total current assets Property and equipment: Land Buildings and equipment, net Total property and equipment Total assets $ 165,000 116,390 281,390 346,390 $ $ 30,000 20,000 12,000 3,000 65,000 $ 1998 20,000 17,000 10,000 2,000 49,000 123,000 128,000 251,000 300,000 NORTON CORPORATION Balance Sheets December 31, 1999 and 1998 1999 Liabilities and......

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...Profitability ratios measure the company's use of its assets and control of its expenses to generate an acceptable rate of return Gross margin, Gross profit margin or Gross Profit Rate[7][8] [pic] OR [pic] Operating margin, Operating Income Margin, Operating profit margin or Return on sales (ROS)[8][9] [pic] Note: Operating income is the difference between operating revenues and operating expenses, but it is also sometimes used as a synonym for EBIT and operating profit.[10] This is true if the firm has no non-operating income. (Earnings before interest and taxes / Sales[11][12]) Profit margin, net margin or net profit margin[13] [pic] Return on equity (ROE)[13] [pic] Return on investment (ROI ratio or Du Pont Ratio)[6] [pic] Return on assets (ROA)[14] [pic] Return on assets Du Pont (ROA Du Pont)[15] [pic] Return on Equity Du Pont (ROE Du Pont) [pic] Return on net assets (RONA) [pic] Return on capital (ROC) [pic] Risk adjusted return on capital (RAROC) [pic] OR [pic] Return on capital employed (ROCE) [pic] Note: this is somewhat similar to (ROI), which calculates Net Income per Owner's Equity Cash flow return on investment (CFROI) [pic] Efficiency ratio [pic] Net gearing [pic] Basic Earnings Power Ratio[16] ......

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...The use of Financial Ratios for Research: Problems Associated with and Recommendations for Using Large Databases Introduction The use of financial ratio analysis for understanding and predicting the performance of privately owned business firms is gaining in importance in published research. Perhaps the major problem faced by researchers is the difficulty of obtaining an adequate sample of representative financial statements with many studies using 50 or fewer firms for analysis. However, when larger databases are used, it is important to know that they have problems as well and that adjustments to these samples must be made to permit the use of multivariate analysis techniques. Understanding how to properly use large databases for ratio analysis will become of importance now that the Kauffman Center for Entrepreneurial Leadership (KCEL) has developed a financial statement database of more than 400,000 privately owned firms with a significant number of these including a base year and three operating years of financial statements. This database is currently available to a team of scholars working closely with the KCEL on selected internal studies. It is expected that this database will become generally available to researchers and this source of financial statement information is likely to become the standard for financial performance research in the future. For the first time, scholars will have a large commonly available database of privately owned firm......

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...The Use of Ratio Analysis Ratio analysis is a tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis to judge the performance of the company. Analyzing ratios is used to evaluate a company's present performance and its possible future performance. In a fact, interpretation of different accounting ratio lets the researcher fully understand the financial condition and performance of a business concern. Ratio itself is the comparison of one figure to another relevant figure. (http://www.investopedia.com/terms/r/ratioanalysis.asp) There are many ratios that you can use to analyze the financial health of a business. In this paper I will discuss four financial performance areas that I think are worth analyzing: Liquidity, profitability, solvency, and efficiency. I will discuss the strengths and weaknesses of using these ratios. First of all, Liquidity is the ability of the firm to convert assets into cash. It is also called marketability or short-term solvency. The liquidity of a business firm is usually of particular interest to its short-term creditors since the liquidity of the firm measures its ability to pay those creditors. Several financial ratios measure the......

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