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Discussion week 3 - and how much money it can have...

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Discussion week 3 There are different measures that help financial analysts and potential investors have an even clearer picture of a company’s profitability from its financial statements (Easton, Halsey, McAnally,Hartgraves & Morse, 2010). Among these measures I find analyzing the Return on equity (ROE) as one of the most interesting and useful. According to Easton et al., it focuses on the level of profitability in relation to the amount of capital invested. ROE=Net Income/ Average Stockholders’ Equity Two companies could show a high level of profitability. The ROE gives us an opportunity to determine which company managed to produce the high income with the lesser stockholder investment. Being able to make more profit from less equity could be a sign of a well managed company. Another aspect of a company’s financial situation that I personally find very telling is the company’s liquidity. Easton et al., defines liquidity as how much cash a company has
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Unformatted text preview: and how much money it can have available in short notice if the need arises. The Current ratio expresses the relation between current assets and current liabilities. We use the following formula to compute it: Current Ratio = Current Assets/Current Liabilities A positive current ratio means that if liquidated the amount of cash earned would be enough to cover the company’s immediate liabilities. Another ratio that I have selected is the Net Operating Asset Turnover (NOAT) NOAT = Revenues/Average NOA Similarly to the ROE the NOAT illustrates the company’s productivity. The NOAT particularly focuses on how much profit is generated by the company’s net operating assets (Easton et al,2010). A high NOAT means a solid performance managing the company’s assets. Easton, P.; Halsey, R. F.; McAnally, M. L.; Hartgraves,A. & Morse, W., (2010). Financial & Managerial Accounting for MBAs . Canada: Cambridge Business Publishers....
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