03 Ratio analysis - handout

03 Ratio analysis - handout - Financial Statements...

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Financial Statements Analysis: (aka, Ratio Analysis)
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Mind Map Given that we can dig through the mess made by the accountants, we still need to understand what represents “excellent performance” for a firm. As a first step, we can use key ratios to compare the subject firm to the industry, market, key competitors, or top performers.
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Mind Map Learning objective: Articulate to usefulness and limitations of ratio analysis Identify key areas of analysis Calculate key ratios Demonstrate the ability to interpret ratios
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How do we make financial statements talk? Compare Google and Twitter – different size, strategy, and risk. Which is healthier? Which is the better investment? Major tool: RATIO ANALYSIS Why ratios?
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Financial Ratios Tools that help us determine the financial health of a firm. We can compare a firm’s financial ratios with its ratios in previous years (trend analysis ). We can compare a firm’s financial ratios with those of its industry (cross-section ).
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RATIOS ANSWER QUESTIONS ABOUT THE FIRM’S: Liquidity Efficient use of Assets Leverage (financing) Profitability
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RATIOS YOU NEED TO KNOW -- LIQUIDITY Current ratio = curr. assets / curr. liab. Quick ratio = curr. Assets-inv/curr liab Average collection period = A.R./ daily credit sales A/R turnover = Credit sales / A/R Inventory Turnover = COGS / Inventory
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RATIOS YOU NEED TO KNOW -- EFFICIENCY Total Asset turnover = sales / total assets Fixed Asset turnover = sales / fixed assets OIROI = operating income / total assets
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RATIOS YOU NEED TO KNOW -- FINANCING Debt ratio = total debt / total assets Times int. earned = EBIT / Int. Exp Also defined: (EBIT+depr) / Int. Exp We’ll use book definition: EBIT / Int. Exp
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RATIOS YOU NEED TO KNOW -- PROFITABILITY ROA = NI / total assets ROE = NI / total equity Gross Margin = Gross profit / sales Operating margin = EBIT / sales Net Margin = NI / sales
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03 Ratio analysis - handout - Financial Statements...

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