Ch. 2 Analysis of Financial Statements

Financial Statement (Ratio) Analysis

Accounting numbers translated into relative values, or ratios, designed to show relationships between financial accounts within firms and between firms, no matter their sizes.

Discussions of Operations

Financial Reporting

The Annual Report

Purpose of Ratio Analysis

provides indication of future and present financial position of a firm, and gives management planning ideas, also used to highlight weaknesses and strengths.

Liquidity Ratios

provide indication of firm’s ability to meet current obligations

Ex. Current Ratio, Quick Ratio

Asset Management Ratios

Ratios that measure how effectively a firm is managing its assets.

Ex. Inventory Turnover, DaysSalesOutstanding, Fixed Asset Turnover, Total Assets Turnover

Debt Management Ratios

Ratio that measures how much debt a firm has and if they can take on more debt.

Ex. Debt Ratio, Times interest earned, fixed charge coverage ratio

Profitability Ratios

Group of ratios showing the effect of liquidity, asset management, and debt management on operating results.

Ex. Net profit Margin, ROA, ROE

Market Value Ratios

Set of ratios that relate a firms stock price to its earnings and book value per share. What d investors think about the firms future financial prospects?

Ex. Price/Earnings ratio