chapter 3 - Chapter 3 Ration analysis using financial to...

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Chapter 3 Ration analysis – using financial to analyze firm financial statements for the purpose of making better financial management decisions Why evaluate financial statement? 1. internal use – evaluate performance, look for trouble spots, generate projections 2. external use – making credit decisions, evaluating competitors, assessing acquisitions Things to consider concerning financial ratios: - What aspects of the firm are we attempting to analyze? - What information goes into computing a particular ratio and how does that information relate to aspects of the firm being analyzed? - What is the unit of measurement? (Time, day, period) - What are the benchmarks used for comparison? What makes a good or bad ratio? Categories of financial ratios: 1. Short term, solvency, or liquid ratios: ability to pay bills in the short run 2. Long term, solvency, or financial leverage ratios: meet long run obligations 3. Asset management or turnover ratios: efficiency of assts use 4. Profitability ratios: efficiency of operations and how that translates to the “bottom line” 5. Market value ratios: How market values the firm relative to the book value 1. Short term solvency or liquid ratio
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chapter 3 - Chapter 3 Ration analysis using financial to...

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