CHAPTER 4 - Evaluating a Firm’s Financial Performance Orientation : Financial analysis can be defined as the process of assessing the financial condition of a firm. The principal analytical tool of the financial analyst is the financial ratio. In this chapter, we provide a set of key financial ratios and a discussion of their effective use. I Financial ratios help us identify some of the financial strengths and weak-nesses of a company. II. The ratios give us a way of making meaningful comparisons of a firm’s financial data at different points in time and with other firms. III. We could use ratios to answer the following important questions about a firm’s operations. A. Question 1: How liquid is the firm? 1. The liquidity of a business is defined as its ability to meet maturing debt obligations. That is— does or will the firm have the resources to pay the creditors when the debt comes due? 2.
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