Things to Consider When Using Financial Ratios Firm performance can be measured along a number of dimensions expressed through ratios what aspect of the firm or its operations are we attempting to analyze? Time-series analysis? Cross-sectional analysis?
Categories of Financial Ratios Short-Term Solvency, or Liquidity Ability to pay bills in the short-run Long-Term Solvency, or Financial Leverage Ability to meet long-term obligations (Ability to pay long-term debt) Asset Management, or Turnover Intensity and efficiency of asset use Ex) sales / total assets Profitability The ability to control expenses Ex) Net income / total assets Difference between asset management and profitability is that that profitability takes in the ability to control costs and expenses.
Hermetic, Inc. Balance Sheet as of December 31 ($ in thousands) Assets 2005 2006 Current assets Cash $ 45 $ 50 Accounts receivable 260 310 Inventory 320 385 Total $ 625 $ 745 Fixed assets Net plant and equipment 985 1100 Total assets $1610 $1845
Hermetic, Inc. Balance Sheet (concluded) Liabilities and equity 2005 2006 Current liabilities Accounts payable $ 210 $ 260 Notes payable 110 175 Total $ 320 $ 435 Long-term debt 205 225 Stockholders’ equity Common stock and paid-in surplus 290 290 Retained earnings 795 895 Total $1085 $1185 Total liabilities and equity $1610 $1845
Income Statement ($ in thousands) Net sales Cost of goods sold
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