3-3040 2010 RATIO ANALYSIS

3-3040 2010 RATIO ANALYSIS - FINANCIAL RATIO ANALYSIS RATIO...

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Unformatted text preview: FINANCIAL RATIO ANALYSIS RATIO ANALYSIS Corporations account for financial performance with an Income Statement, a Balance Sheet, and other financial statements. Ratios restate the reported information in a more meaningful manner, suitable for analysis and interpretation of corporate performance. RATIO ANALYSIS Topics covered: Who uses ratios and why Types of financial ratios Cross sectional Who Uses Ratios and Why 1. Financial analysts, professionals and individual investors a. To advise clients b. To invest mutual and pension fund money for clients c. Personal stock selection and portfolio maintenance 1. Bank loan officers a. To assess credit worthiness of company loan application 1. Rating agencies (D&B, Moodys, S&P) a. To rate the bonds and preferred stock of corporations b. To rate short-term credit worthiness 4. Company management a. To evaluate their companys performance b. To determine performance bonuses c. To control costs, make decisions TYPES OF FINANCIAL RATIOS Liquidity Ratios Measures ability to meet short-term debt payments Focuses on current assets and current liabilities Current ratio Current assets current liabilities Quick ratio Current assets inventory Current liabilities BALANCE SHEET (2009) INCOME STATEMENT (2009) Cash & securities $ 10 A/P $ 60 Net sales $3,000.0 A/R 375 N/P 110 Costs, no depr. 2,616.2 Inventories 615 Accruals 140 Depr. 100.0 Total CA 1,000 Total CL 310 Operating costs 2,716.2 Net P&E 1,000 Total debt 1,064 EBIT 283.8 Preferred 40 less interest 88.0 Common 130 EBT 195.8 RE 766 Taxes 78.3 Common eq. 896 NI before Pref. 117.5 Total assets $2,000 Total liab. & Eq. 2,000 Pref. dividends 4.0 NIAT (to common) $113.5 Liquidity Ratios Current ratio 1,000/310 = 3.2 Industry Avg. = 4.2 BALANCE SHEET (2009) INCOME STATEMENT (2009) Cash & securities $ 10 A/P $ 60 Net sales $3,000.0 A/R 375 N/P 110 Costs, no depr. 2,616.2 Inventories 615 Accruals 140 Depr. 100.0 Total CA 1,000 Total CL 310 Operating costs 2,716.2 Net P&E 1,000 Total debt 1,064 EBIT 283.8 Preferred 40 less interest 88.0 Common 130 EBT 195.8 RE 766 Taxes 78.3 Common eq. 896 NI before Pref. 117.5 Total assets $2,000 Total liab. & Eq. 2,000 Pref. dividends 4.0 NIAT (to common) $113.5 Liquidity Ratios Current ratio: 1,000/310 = 3.2 Industry Avg. = 4.2 Quick ratio: (1,000 615)/310 = 1.2 Industry Avg. = 2.1 RATIO ANALYSIS 1. Firm A Firm B Current ratio 1.92 1.92 Quick ratio .75 .48 a. Which firm has a higher proportion of its current assets invested in inventory? RATIO ANALYSIS 2....
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This note was uploaded on 02/16/2011 for the course FIN 304 taught by Professor S during the Spring '11 term at Toledo.

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3-3040 2010 RATIO ANALYSIS - FINANCIAL RATIO ANALYSIS RATIO...

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