Session 6A: Financial Ratios (Examples)

In this session, I use financial ratios, grouped into profit margins, returns on equity/invested capital, efficiency ratios, debt ratios and coverage ratios to analyze a diverse set of companies. As I do this, I also note how these ratios evolve as companies age.
Slides: www.stern.nyu.e...
Post class test: www.stern.nyu.e...
Post class test solution: www.stern.nyu.e...

[@nsnilesh604]

Happy Teacher's Day sir, i really enjoy your sessions and getting new ways of looking at company financials👌

[@sumitkadwadkar3142]

Thank you for the Entire Series Sir, it helped me clear my basics.

[@neerajgupta3876]

Dear Sir: You are simply awesome in terms of your teaching style and content which is quite pragmatic. Your lectures are like a story, and I did not feel bored for a sec. Really helpful and I am going to watch all of your lecture series.

[@thanachaikongthaisereekul3836]

Thank you! These videos are great for refreshing memory years ago. I finish them all without feeling bored. Companies used in the examples are the updated ones as well!

[@CTSSHAH]

Thank you for putting this out on RUclips for non students to learn! Was a truly wonderful series

[@josephfraresso3567]

Thanks for putting together this series of videos. They are a great introduction to accounting concepts and their limitations.

[@rajatjindal2245]

Thank you, professor! This was a wonderful introduction to accounting and I have truly enjoyed every second of it. Now, I will move on to your corporate finance course. Thank you so much for all of this.

[@mmorpe]

Dear Professor Aswath, big fan of yours. Going through your online lectures, they are great in contents and presentation. I have done M&A courses through HBS and Insead, but I can see that your lectures are very helpful in bridging several gaps that were left at the time. I am not an accountant or corporate finance guy, but have been self learning various aspects over past several years. Do keep posting. I will be eagerly awaiting you to start Valuation course in Jan 22. Best regards, Milind Orpe

[@av_0126]

Great lectures! Thanks! As an accountant, this helped me view accounting from a different perspective.

[@artempazukhin4246]

I did find this course very usefull and thank you for videos

[@ignaciobenavides4729]

Thanks Aswath for uploading these videos, they are great.

[@xgum]

blessed to have discovered aswath right when my macc started

[@raid9535]

thank you for posting these vids Dr. Aswath. very helpful to prepare. I noticed:
- a spelling error on your answer sheet for Q2 about Goodwill.
- Q3 answers for turnover ration numbers for sales to invested capital (both starting and average) are mentioned 4.08 and 2.73 respectively. While what is am getting is slightly different as 3.96 and 2.68

[@tech4028]

Question: Do you know where he gets his data for Peleton? I get substantially higher metrics (for instance revenue) for Peleton!

[@stuartclark5029]

@@tech4028 Looks like it's from 2017

[@tech4028]

@@stuartclark5029 Oh. Thanks!
Do you know why you have to take the values for the *end of previous year* to calculate invested capital? Why do you take the values of the end of the previous years?

[@pearlynsth]

@@tech4028 I'd love to know too, thanks!

[@millennialmalayali478]

Thanks for this course professor.

[@CoinsReport]

Love from India sir❤

[@InvestorCenter]

Why couldn’t my finance professors be this good?

[@prasantdara]

@Aswath Sir - I noticed a minor correction for Total's Current Liabilities (it should be $ symbol, not the Rupee). Thanks. As usual, great informative videos from you. Thanks again sir.

[@trainingwood]

Great teachings and since I am learning all of this from zero without any prior knowledge it takes me a multiple times of rewatching to be able to do tests and to understand the matter. Can somebody explain calculation for ROE which is net income/book equity I would expect net income and book equity to be from the same, most recent year, and in the test net income is from the most recent year and book equity(shareholders equity) from the last year.

[@tech4028]

Invested Capital: Why *end of previous year*? Why do you take the values of the end of the previous years?

[@anastasiosmetaxas94]

Professor, you said that Dr Reddy's ROIC might be overstated because its biggest asset (investing in R&D) is expensed. However, assuming that we change the accounting treatment and we capitalize the R&D expense, the increase in the invested capital won't be offsetted with the proportionate increase in the Operating Profit? (as R&D expenses are not used anymore for the calculation of this figure)

[@julanivishal]

That is what he want to say. It is more profitable than it looks.

[@misterr2359]

Thank you very much for this class.

[@soumyajyotipaul4915]

in question 5 of post class test shouldn't 'Interest Expense Finance Division' be added to (Operating Income- Financing Rev + Financing Op Exp), for calculation of interest coverage ratio without financing ?

[@tanyaavasthi]

Thank you sir!

[@manubhatt3]

Is the Sales to Invested Capital ratio of Netflix, the default accounting one or an updated/fixed one in which it's content expenses are converted to capex? If former, then wouldn't it's real Sales to Invested Capital ratio be considerably less than 1.71?

[@tech4028]

Thanks for the great video(s). I took a look at Peleton's financial statements and found other number for revenue & gross profit, for instance. Where did you get the data from?

[@nevilleedwards3237]

Thank you

[@johnnyknight2157]

first and also i love ur videos

[@matiasnicolini]

on the post-class test, how do you get the Effective tax rate? I understood that it is taxes/income taxes. But where in the income statement is the total tax number?

[@kqxtop]

In question Number 5 when you're calculating the coverage ratio without the financing division shouldn't we add back the Finance Division Interest Expense too?

[@alihakanmutluay]

Thank you for great 12 Sessions. For the last two sessions i am curious about ratios while you saying "less is more" ; if so, why not giving any referance for Altman Z scores that explains distress risk whith no more than 4 or 5 financial ratios? (Although you and Altman working in the same university of NY)

[@AswathDamodaranonValuation]

A Z score is not a ratio. It is composite score computed from other ratios. And it explains default risk about as well as ratings do, no better, no worse.

[@mabedi94]

How do you deal with / think about companies that have negative stockholders' equity?

[@akhil_121]

In the profitability slide at 3:51 Dr Reddy's have a higher net margin as compared to its operating margin. What could be the reason for this anomaly? Can someone explain??

[@JrJ2016]

Sir, you did not explain why you downplay current and quick ratios..

[@Motivation2Invest]

I would also like to know this, seems like a great way to quickly assess companies short term debt 🤔

[@mmorpe]

@@Motivation2Invest - My guess is that current ratios have little role to play in corporate financing and valuation perspective. Ability to consistently pay finance cost from operating margin (after tax) is a key to company survival.

[@Austin-wh4yi]

I am wonder why he is using 2019's total debt, cash and equity and 2020's Revenue number to calculate Sales to Invested Capital.