09_22_09 Ch4 Analysis of Financial Statements

09_22_09 Ch4 Analysis of Financial Statements -...

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Chapter 4 Outline: Analysis of Financial Statements Primary goal of financial management is to maximize shareholders wealth Financial analysis involves o Comparing the firm’s performance to that of other firms in the same  industry o Evaluating trends in the firm’s financial position over time ROE –  Return on Equity o Tells us, how much stockholders are earning on the funds they provide to  the firm o Managers use ration to help develop plans to improve ROE Ratio Analysis 1. Liquidity Ratios –  give us an idea of the firms ability to pay off debts that are  maturing within a year Good ratios are need if the firm wants to continue operating Liquid Assets –  An asset that can be converted to cash quickly without having  to reduce the asset’s price very much o Current Ratio –  indicates the extent to which current liabilities are  converted by those assets expected to be converted to cash in the near  future = Current Assets / Current Liabilities  CA = includes cash, marketable securities, AR, inventories  CL = AP, AW, taxes and short term notes payable due within a  year If current liabilities are rising faster than current assets the  current ratio will fall, and is a sign of possible trouble A too high CR indicates Very strong, safe liquidity position The firm has too much old inventory Too much cash/receivables o Quick (Acid Test) Ratio – = Current Assets – Inventories / Current Liabilities 
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09_22_09 Ch4 Analysis of Financial Statements -...

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