Ch 4 Analysis of Financial Statements

this represents what percentage of sales that income represents

profit margin

if a company's operating margin increases but the profit margin decreases, what could this mean?

the company paid more in interest and taxes.

if a company issues new common shares but its net income does not increase, return on common equity:

will decrease

a company with what type of liquidity ratio is likely to have enough resources to pay off its short-term obligations?

high liquidity ratio

these ratios provide insights into managements efficiency in using a firm's working capital and long-term assets

asset management ratios

these ratios indicate whether a company has sufficient cash to repay its long-term debt obligations.

debt ratios

if a company's income has increased, what will happen to the profitability margin?

it will increase as long as sales did not increase more than net income.

these ratios help analysts figure out what investors and the markets think about the firm's growth prospects or current and future operational performance

market value ratios

3 examples of limitations on ratio analysis?

inflation can skew balance sheets, "Window dressing" techniques make ratios look better than they are, and different operating and accounting practices can distort comparisons.

what asset is considered to be the most liquid?

cash

what asset is considered to be the least liquid?

inventory

this ratio measures the company's ability to meet its short-term obligations using its most liquid assets

quick ratio

if a company's current liabilities are increasing faster than its current assets, then the company's liquidity is:

weakening or decreasing

if the difference between a company's current ratio and quick ratio is large, what does that tell us about the company?

it relies on the sale of inventory to meet short-term obligations

a company is less reliant on sources of outside cash flow when their liquidity is:

high

what level of total assets turnover rate indicates a higher level of efficiency?

a higher one

companies that use borrowed money are considered

financially leveraged

typically companies that are financially leveraged are associated with more:

risk

under economic growth conditions, firms with relatively more leverage can expected what type of returns?

higher returns

creditors would prefer to give loans to companies with what type of debt ratios?

low

what ratio indicates how many times during the year inventory is sold and restocked.

inventory turnover ratio

this ratio analyzes how effectively a firm uses its plant and equipment

fixed asset turnover ratio

this ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest payments

timer interest earned ratio

what ratio is more complete than the TIE ratio because it recognizes that depreciation and amortization are not cash expenses, so these amounts are available to service debt.

EBITDA coverage ratio

this margin measures the combined impact of operating efficiency and leverage on the firm's profitability.

profitability margin

this margin only looks at operating efficiencies

operating margin

a low ROA can result from a firm's decision to use more debt because high debt will cause net income to

decline

this ratio shows how much investors are willing to pay per dollar of current earnings

Price/Earnings Ratio

Firms with low risk and strong growth prospects generally have what type of p/e ratio?

high

what type of ratio do you want to see when analyzing market/book ratios?

a ratio that exceeds one

How can a company have a negative P/e ratio?

when a company has a negative EP ratio, which indicates that a company has no earnings that quarter

companies with high research and development expenses tend to have what type of p/e ratios

high

measures the rate of return on common shareholders investments

ROE- return on equity

often referred to as the "bottom line" in analysis

ROE

in a DuPoint equation, a high equity multiplier can come from what two situations?

an increase in the firm's total assets or an increase in its use of debt financing

companies with high p/e and high m/ratios generally are regarded as

little risk

what is a better means of judging a company's operating efficiency because they reflect the affects of debt and taxes: BEP or returns on assets

return on total assets