For example if total asset turnover decreases while

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For example, if total asset turnover decreases while fixed asset, inventory and receivable turnover ratios increase, it indicates that sales relative to the other assets like intangibles and investments are smaller. Perhaps the firm made a big investment in intangibles and those intangibles are less effective at generating sales in the current period. 3
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Riffe – ACCT 6201 – Session 7 – Fall 2018 TI Calculation for 2017 Trend Analysis 2016 to 2017 Receivable Turnover – Went up, good. They are receiving cash more frequently. They are collecting cash more quickly. Inventory Turnover – Went down, Bad. Inventory is building up. It is taking longer to sell inventory. PPE Turnover – Went up and good. More effective in generating sales relative to PPE Cross-sectional Analysis TI Compared to Qualcomm and ADI in 2017 Receivable Turnover – Inventory Turnover – PPE Turnover – 4
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Riffe – ACCT 6201 – Session 7 – Fall 2018 Leverage If ROE is higher than ROA (for profitable firms), then it means the firm is effectively using debt to increase return on equity. It indicates the return generated from assets purchased with debit financing is higher than interest costs. The advantage of debt is that the firm can use the proceeds from the debt to make investments in assets that will generate earnings. If the earnings generated from the money borrowed are able to cover the interest costs, returns to shareholders are magnified. When a firm adds debt, shareholders do not have to contribute more cash into the firm, but shareholder benefit from the additional net income the firm generates so ROE increases. However, the disadvantage of debt is the increased risk that firms may not have enough cash to pay back their obligations, which can result in bankruptcy. In case of bankruptcy, all liabilities are paid first before shareholders receive any cash for their equity claims. The primary Leverage ratio is: = Average Assets Average Stockholder s ' Equity . Because leverage increases risk, additional ratios are needed to assess if the firm can effectively make the payments required. The ratios are divided into liquidity and solvency indicators. Liquidity- cash available Liquidity ratios indicate if the firm has the current assets and the ability to quickly create cash to meet current liabilities. There is an inverse relationship between liquidity and risk. If a firm has less liquidity, it increases risk because they may have difficulty meeting their obligations. Current Ratio = Current Assets Current Liabilities The higher the ratio, the greater the liquidity. The current ratio should be greater than 1, but firms with a steady inflow of cash and a lot of liquid assets may be content to keep a lower current ratio. It is a limited measure of liquidity because a firm can have a high current ratio because accounts receivable and inventory (included in the numerator) are high, which may indicate the firm is having difficulty selling inventory and collecting cash.
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  • Fall '09
  • Robbins
  • Balance Sheet, Generally Accepted Accounting Principles, TI

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