Chapter 3 textbook P50-end

Chapter 3 textbook P50-end - 2.2 using financial ratios...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
2.2 using financial ratios Ratio analysis: involves methods of calculating and interpreting financial ratios to analyze and monitor the firm’s performance The basic inputs to ratio analysis are the firm’s income statement and balance sheet. Two types of ratio comparisons can be made: cross-sectional and time-series. Cross-sectional analysis: comparison of different firms’ financial ratios at the same point in time; involves comparing the firm’s ratios to those of other firms in its industry or to industry averages. Benchmarking: a type of cross-sectional analysis in which the firm’s ratio values are compared to those of a key competitor o group of competitors that it wishes to emulate Time-series analysis: evaluation of the firm’s financial performance over time using financial ratio analysis. 2.3 Liquidity Ratios Liquidity: a firm’s ability to satisfy its short-term obligations as they come due. Current ratio: a measure of liquidity calculated by dividing the firm’s current assets by its current liabilities. Current ratio = current assetscurrent liabilities The higher the current ratio ----- more liquid the firm is considered to be. Liquidity ratio = Total liquid assetsTotal current debts Indicates the percent of annual debt obligations that an individual can meet using current liquid assets Quick (Acid-test) Ratio: a measure of liquidity calculated by dividing the firm’s current assets minus inventory by its current liabilities. Quick ratio = - current assets inventorycurrent liabilities Low liquidity of inventory: 1. Inventory cannot easily sell 2. Inventory is typically sold on credit 2.4 Activity Ratios Activity ratios: measure the speed with which various accounts are converted into sales or cash –
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/15/2011 for the course BUAD 3040 taught by Professor Smallman during the Spring '11 term at Ohio State.

Page1 / 4

Chapter 3 textbook P50-end - 2.2 using financial ratios...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online