Chapter 4 FIN

Chapter 4 FIN - Chapter 4 Financial Ratios accounting data...

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Chapter 4 Financial Ratios: accounting data restated in relative terms in order to help people identify some of the financial strengths and weaknesses of a company. *Financial ratios are used to: Identify deficiencies in the firm’s performance and take corrective action Evaluate employee performance and determine incentive compensation Compare the financial performance of the firm’s different divisions. Prepare, at both the firm and division levels, financial projections, such as those associated with the launch of a new product Understand the financial performance of the firm’s competitors. Evaluate the financial condition of a major supplier *Outside the company, financial ratios can be used by: - Lenders to decide whether or not to make a loan to the company - Credit-rating agencies to determine the firm’s creditworthiness - Investors to decide whether or not to invest in a company - Major suppliers to decide whether or not to grant credit terms to a company 1. How liquid is a firm? Liquidity: a firm’s ability to pay its bills on time. Liquidity is related to the ease and quickness with which a firm can convert its noncash assets into cash, as well as the size of the firm’s investment in noncash assets relative to its short-term liabilities Current Ratio: a firm’s current assets divided by its current liabilities. This ratio indicates the firm’s degree of liquidity by comparing its
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This note was uploaded on 08/30/2011 for the course FIN 3310 taught by Professor Potts during the Fall '08 term at Baylor.

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Chapter 4 FIN - Chapter 4 Financial Ratios accounting data...

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