Ch4_financial ratios_source of financing

Ch4_financial ratios_source of financing - Financial...

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Horizontal Analysis ompares two financial statements hows dollar and percentage differences Differences 2010 2011 $ % Cash $10,000 $15,000 + $5000 50% Financial Analysis Assessment of the firm’s past, present and future financial conditions Time, Industry, Segment Three approaches to financial statement analys: Horizontal analysis, Vertical analysis, Ratio analysis
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Vertical Analysis inancial statements reduced to percentages or example, alance sheet: Assets = 100% ncome statement:
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ALPHA Co. BETA Co. Dollars % Dollars % Net revenue $100,000 100% $500,000 100% Cost of sales 35,000 35 200,000 40 Labor costs 30,000 30 150,000 30 Other expenses 30,000 30 190,000 28 Net income $5,000 5% $10,000 2% Which company has the better performance? Why? Vertical Analysis
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Ratio Analysis Ratio analysis is used to take existing financial accounting information and generate new information. Expressed as $, %, times, days, etc Ratios on their own are not very meaningful. Must be compared with a standard and also the past Potential Ratio Standards : Ratios from a past period, Industry averages, Budgeted or planned ratios Various ratios of a hospitality organization can be compared to industry averages. However: Which segment of the hospitality industry? Which companies are included in the industry averages? Are there enough firms in the average to make the ratios meaningful? Do all the firms use the same accounting methods?
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Purposes of Ratio Analysis Managers use ratios to monitor operating performance and evaluate their success in meeting goals. Creditors use ratios to evaluate the solvency and liquidity of a business and to assess the risk of future loans. Investors and potential investors use ratios to evaluate the performance of a business and the business’s ability to meet the investors’ specific goals. Ratios reveal important information that may not be obvious or apparent in the financial statements.
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6 Financial Ratio Analysis Over Time 2005 2006 2007 Firm X current ratio 1.9 2.2 2.3 Within the Industry 2007 Firm X current ratio 2.3 Industry norms 2.5 Both should be considered simultaneously 2005 2006 2007 Firm X current ratio 1.9 2.2 2.3 Industry norms 2.5 2.4 2.5
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Types of Ratios Liquidity Can the firm meet its short-term obligations? Liquidity refers to how much cash (or assets that could be quickly converted to cash) a business has on hand so as to pay its bills on time. Of Interest to short-term creditors
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Ch4_financial ratios_source of financing - Financial...

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