financial+Chapter 8

financial+Chapter 8 - Chapter 8 Analyzing Financial...

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Learning Objectives: After studying Chapter 8 you should Understand analyzing financial statements across time. Understand analyzing financial statements with industry averages. Know how to prepare common-size financial statements. Understand the debt to equity ratio and know how to calculate. Understand the return on equity ratio and know how to calculate. Understand the current ratio and know how to calculate. Understand the asset turnover ratio and know how to calculate. Understand the basic earnings per share and know how to calculate. Financial statements are the representation to the world of how the company is doing. The “world” includes professional financial analysts, stockholders, debtors, and suppliers of the company as well as competitors of the company and many others who have various reasons for their interest in the status of the company. Many of these readers of financial statements have little or no other information about the company. Because of this and because there is a large volume of information contained in the financial statements, analysts of all kinds have developed some standard methods of analyzing this data to help them focus on the important points. Analysis Across Time: It is important to look at the current year’s financial statements and make some comparisons with the company’s statements of prior years. This helps the reader to answer questions such as: Is the company buying increasing amounts of assets? Is the debt or equity of the company increasing? How has net income changed? How has the gross profit of the company changed? How much of the company’s earnings has it maintained and how much as it paid out as dividends? Answers to questions such as these as well as many others help the reader understand the intentions and the effectiveness of management. Analyses across time give the reader a feeling for the trend in which the company is moving. Analysis Within the Industry: It is helpful for outside readers of financial statements as well as the management of a company to look at the financial statements of other businesses in the same industry. These competitor companies face many of the same obstacles and their financial data can provide valuable information as to how they operate and how successful their choices have been. Some things which can be discovered about the competitor companies from looking at their financial statements are: Are major assets purchased or leased? Are the majority of their assets financed with debt or with equity? How high is their gross profit? Do they pay dividends? Are they investing in more fixed assets?
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financial+Chapter 8 - Chapter 8 Analyzing Financial...

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