Fin320-CH4 - FIN 320 Chapter #4: Evaluating a Firms...

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  FIN 320 Chapter #4: Evaluating a Firm’s Financial Performance Christo Pirinsky
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  Learning Objectives After reading this chapter, you should be able to: Explain the purpose and importance of financial analysis. Calculate and use a comprehensive set of measurements to evaluate a company’s performance. Describe the limitations of financial ratio analysis.
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  Principles Used in this Chapter Principle 7 : Managers Won’t Work the Owners Unless it is their best Interest. Principle 5 : The Curse of Competitive Markets – Why It’s Hard to Find Exceptionally Profitable Markets. Principle 1 : The Risk Return Trade-Off – We Won’t Take on Additional Risk Unless We Expect to Be Compensated with Additional Return.
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  Financial Ratios Ratios give us two ways of making meaningful comparisons of a firm’s financial data: Trends across time Comparisons with other firms’ ratios
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  Uses of Financial Ratios within the Firm Identify deficiencies in a firm’s performance and take corrective actions. Evaluate employees’ performance and determine incentive compensation. Compare the financial performance of different divisions within the firm
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  Uses of Financial Ratios within the Firm Prepare financial projections, both at the firm and division levels. Understand the financial performance of competitors Evaluate the financial condition of a major supplier.
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  Uses of Financial Ratios Outside the  Firm Lenders in deciding whether or not to make a loan to a company. Credit-rating agencies in determining a firm’s credit worthiness. Investors in deciding whether or not to invest in a company. Major suppliers in deciding to sell and grant credit terms to a company.
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  Measuring Key Financial Relationships How liquid is the firm? Is management generating adequate operating profits on the firm’s assets? How is the firm financing its assets? Is management providing a good return on the capital provided by the shareholders? Is the management team creating shareholder value?
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  Common Financial Ratios Inventory Sold Goods of Cost Turnover Inventory Receivable Accounts Sales Credit Annual Turnover Receivable Accounts 365 Sales Credit Annual Receivable Accounts Period Collection Average s Liabilitie Current Inventory - Assets Current Ratio Quick s Liabilitie Current Assets Current Ratio Current = = = = = I. Liquidity Ratios:
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  Common Financial Ratios II. Profitability and Asset Use Efficiency Ratios: Assets Fixed Sales Turnover Asset Fixed Assets Total Sales Turnover Asset Total Sales Profit Operating Margin Profit Operating Assets Total Return Operating Assets on Return Operating = = = =
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  Common Financial Ratios III. Leverage (Financing) Ratios: Equity Common Income Net (ROE) Equity on Return Interest Income Operating Earned Interest Times Assets Total Debt Total Ratio Debt = = =
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Common Financial Ratios IV. Market Value Ratios:
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This note was uploaded on 04/15/2009 for the course FINANCE FIN 320 taught by Professor Cpirinski during the Spring '09 term at CSU Fullerton.

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Fin320-CH4 - FIN 320 Chapter #4: Evaluating a Firms...

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