ch4.pdf - 1 Financial analysis involves 1 Compare the...

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1. Financial analysis involves: 1- Compare the firm's performance to that of other firms in the same industry 2- Evaluate trends in the firm's financial position over time 2. A company's market cap: Is the total market value of the company's stock and it is calculated by multiplying the company's price by the number of outstanding shares 3. Five categories of ratios: 1- Liquidity ratios 2- Asset management ratios 3- Debt management ratios 4- Profitability ratios 5- Market value ratios 4. Liquidity ratios: Give us an idea of the firm's ability to pay off debts that are maturing within a year. Ratios that show the relationship of a firm's cash and other current assets to its current liabilities 5. Liquid asset: An asset that can be converted to cash quickly without having to reduce the asset's price very much 6. Two of the most commonly liquidity ratios: 1- Current ratios - industry avg. 4.2x 2- Quick (acid test) ratios - industry avg. 2.2x 7. Current ratio: This ratio is calculated by dividing current assets by current liabilities. It indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. Industry average is 4.2x. Having less than the average ratio, it represents that the firm's liquidity position is somewhat weak but by no mean desperate. On the other hand, a higher ratio indicates a very strong, safe liquidity position. Sometimes it may mean that a firm has too much old inventory that will have to be written off and too many old accounts receivable that may turn into bad debt. Other cases it means that the firm has too much cash, receivable, and inventory relative to its sales, in which case these assets are not being managed efficiently 8. Quick (acid test) ratio: This ratio is calculated by deducting inventories from current assets and then dividing the remainder by current liabilities. Industry average 2.2x 9. Asset management ratios: A set of ratios that measure how effectively a firm is managing its assets. Give us an idea of how efficiently the firm is using its assets 10. Four categories of asset management ratios: 1- Inventory turnover ratio - industry avg. 10.9x 2- Days sales outstanding( DSO) ratio - industry avg. 36 days 3- Fixed assets turnover ratio - industry avg. 2.8x 4- Total assets turnover ratio - industry avg. 1.8x 11.
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