Financial Statement Analysis - Chapter 15 Financial...

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679 Keeping an Eye on Dividends When the economy sours, inves- tors look closely at a company’s ability to pay dividends. In 2008, 36 of the Standard & Poor’s 500 companies suspended $33.3 billion of dividend payments. Citi- group sliced its dividend 41%, Washington Mutual (now part of JPMorgan Chase ) reduced its quarterly dividend per share from 15 cents to a penny, and CIT Group slashed its dividend by 60%. Some companies increase their market appeal during difficult economic times by remaining committed to generous dividend payments. For example, in 2008 Adrian Darley, of Ignis Asset Management , recommended investing in Vivendi , France Telecom , and Deutsche Telekom because these companies committed to making scheduled divi- dend payments that ranged from 4.9% to 7.2% of their respective stock prices. Sources: Andrea Tryphonides, “Dividends Replace P/Es as Stock Guides,” The Wall Street Journal, November 24, 2008, p. C2; Tom Lauricella, “Keeping the Cash: Slowdown Triggers Stingy Dividends,” The Wall Street Journal, April 21, 2008, p. C1; and Annelena Lobb, “Investors Lick Wounds from Dividend Cuts,” The Wall Street Journal, November 7, 2008, p. C1. 15 C h a p t e r After studying Chapter 15, you should be able to: LO1 Prepare and interpret financial statements in comparative and common-size form. LO2 Compute and interpret financial ratios that would be useful to a common stockholder. LO3 Compute and interpret financial ratios that would be useful to a short-term creditor. LO4 Compute and interpret financial ratios that would be useful to a long-term creditor. LEARNING OBJECTIVES BUSINESS FOCUS Financial Statement Analysis
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680 Chapter 15 A ll financial statements are historical documents. They summarize what has happened during a particular period. However, most users of financial statements are concerned with what will happen in the future. For example, stockholders are concerned with future earnings and dividends and creditors are concerned with the company’s future ability to repay its debts. While financial state- ments are historical in nature, they can still provide users with valuable insights. These users rely on financial statement analysis, which involves examining trends in key finan- cial data, comparing financial data across companies, and analyzing financial ratios to assess the financial health and future prospects of a company. In this chapter, we focus our attention on the most important ratios and other analytical tools that financial analysts use. In addition to stockholders and creditors, managers are also vitally concerned with the financial ratios discussed in this chapter. First, the ratios provide indicators of how well the company and its business units are performing. Some of these ratios might be used in a balanced scorecard approach as discussed in an earlier chapter. The specific ratios selected depend on the company’s strategy. For example, a company that wants to emphasize responsiveness to customers may closely monitor the inventory turnover ratio discussed later in this chapter. Second, because managers must report to stockholders and
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  • Fall '14
  • Balance Sheet, Net Income, Generally Accepted Accounting Principles, Brickey Electronics

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