operating profit was positive, but earnings before taxes

was negative due to our financial expense that represent 4% of our net sale.

So our earnings before tax was negative, -1%.

And the last line that what we call net profit margin.

Net Profit divided by Net Sales.

That what we call vertical analysis.

In the first year, we had a profit 6% compared to our net sale.

The second year, -1% compared to our next sale and

the last year, 8%, 5% compared to our net sale.

Not just that such as vertical analysis or

horizontal analysis for example how our net sale is in quiz.

But also some ratio.

Let's talk about liquidity ratios.

Besides working capital, here are also all the measures and

ratios that evaluates the company liquidity level.

For example, what do we call current ratio which the current assets, you remember

assets, liabilities, our balance sheet, financial picture of a company blah,

blah, blah, current ratio, current assets divide by current liabilities.

It measures the firm's ability to meet its current obligation.

How much asset you have compared to your current liability.

How much rights you have compared to your current obligations.

Not just that if we want to squeeze a little bit, to really understand

if the company has good liquidate, you may estimate your quick ratio.

Which is a current assets- inventory levels-

prepaid expense divide by current liabilities.

Can you see that this kind of ratio, what we call quick ratio,

it measure the firm's ability to meet its current obligation

using only very liquid assets, almost cash.

It's like, how much cash you have to meet all your current liabilities.

So if you have about one, that's because your liquidity ratio is very good.

But you have to check compared to other accompanying the same segment.

And then, if you move forward, do you remember what we discussed?

Average collection period, average inventory period, and

all of the stuff, average collection period.

We have also inventory turnover,

which is average inventory divided by cost of the goods sold.

What does show us?

It measure any disproportional amount of inventory.

A financial, market, and risk executive,

aim to roll its inventory as quicker as possible.

Because you don't want to have a huge amount of inventory.

You want to sell everything as fast as you can

because you cannot have too much working capital.

Working capital cost money so we need to buy raw material,

manufacture and sell very quick.

Hence, the lower the ratio, the better.

What's the ratio?

Average inventory divided by cost of goods sold.

The less inventory that you have, the better your financial management.

And also we would like to discuss financial strength ratios

because it assess the financial strength of a company by how

much a company rely on own funds and borrowed funds.

You guys remember what we discussed lesson one, lesson two, lesson three.

If you do not manage your working capital, you end up on bank's hand.

So we have to check how much your company is exposed to banks.