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D'Leon+A-M+Questions - OL553 DLeon Group Project#1 A Ratios...

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OL553 D’Leon Group Project #1 A . Ratios assist in predicting the future strength, weakness, and direction of a company. As stated in the PowerPoint and the book, the following are ways in which ratios are useful. They also give a starting point for the planning and adjusting strategy for a company. Giving us an idea of where to begin, what areas to tweak.(Pg102) Ratios standardize numbers and facilitate comparisons. Ratio comparisons should be made through time and with competitors Trend analysis Peer (or Industry) analysis Below are the five ratios and how they are used as taken from the PowerPoint slide 4-7 1. Liquidity: Can we make required payments? 2. Asset management: right amount of assets vs. sales? 3. Debt management: Right mix of debt and equity? 4. Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA? 5. Market value: Do investors like what they see as reflected in P/E and M/B ratios? B. It appears that D’Leon’s liquidity position during ’04 was close to the industry average which means that they weren’t doing too bad in terms of maintaining their liabilities and assets. It may need some minor attention, but overall ’04 liquidity was good. In 2005 their liquidity position dropped drastically compared to the industry average which tells us that they may be getting into financial difficulties, bills are being paid in an untimely manner, and they probably have to increase the amount of money they’re borrowing from the bank. However, the possibility of D’Leon being able to liquidate their current assets and pay off creditors in full may still be a possibility because the industry average isn’t necessarily a number that companies strive to maintain. In 2006, it’s forecasted that their liquidity ratio has increased quite a bit back to where it originally was in ’04 when the company appeared to be more stable. This is a good indicator that the company may be headed in the right direction in terms of getting bills paid on time, having to borrow less, and have fewer financial difficulties and is definitely a good sign for anyone with a vested interest in the company (b/c it shows stability). Managers, bankers, and stockholders should share an equal interest in these liquidity ratios because if firm’s ratios are far removed from industry averages analyst will, or should, be concerned with the variance and why it’s occurring because it’s a good sign that the firm may be in financial trouble. In addition, deviation from the industry average would also alert analyst and managers to do some further research due to the financial risk. Basically, as previously mentioned, anyone with a vested interest in the firm should be interested in the liquidity of a firm
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because of all the previous mentioned factors. In addition, who wants to be invested in a copy that wouldn’t be able to pay off bankers, stockholders, etc. if something were to go wrong?
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