Foundations of Finance - Evaluating a Firm’s Financial Performance

Flashcards to help review key concepts of evaluating a firm's financial performance.

What is the purpose of financial analysis?

To evaluate a company's performance through the computation of financial ratios.

What does a ratio in financial analysis represent?

A relationship between two numbers, providing insight when compared to ratios from previous years or industry benchmarks.

What are some common uses of financial ratios within a firm?

Identify performance deficiencies, determine incentive compensation, and evaluate financial conditions of divisions and competitors.

What is liquidity in financial terms?

A measure of a firm's ability to pay its current obligations on time.

How is liquidity typically measured?

By comparing current assets to current liabilities and assessing the conversion of accounts receivable and inventory into cash.

What is the current ratio?

A comparison of a firm’s current assets to its current liabilities.

What is the acid test or quick ratio?

A measure of how readily a company's current assets can be converted to cash to pay current liabilities.

What do the days in receivables measure?

The time it takes for a firm to collect its accounts receivable.

What does accounts receivable turnover indicate?

How many times a firm's accounts receivable are collected within a year.

What is the operating return on assets (ORA)?

A measure of the profitability of a firm's assets, indicated by the operating profit relative to total assets.

What does the operating profit margin (OPM) measure?

The effectiveness of a firm in managing its cost of goods sold and operating expenses.

What does the debt ratio indicate?

The percentage of a firm’s assets financed by debt.

What is times interest earned?

A ratio that indicates how easily a firm can pay interest on its outstanding debt.

What is return on equity (ROE)?

A measure of the return to common shareholders relative to their equity investment.

What are market value ratios used for?

To evaluate investors' perceptions of management's past performance and future prospects.

What differentiates value stocks from growth stocks?

Value stocks are considered inexpensive and often pay dividends, while growth stocks are expected to grow quickly and typically do not pay dividends.