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Analysis Financials

Analysis of Finacial Statements

QuestionAnswer
Explain how financial ratio analysis helps financial managers assess the health of a company. Financial ratios are numbers that express the value of 1 financial variable relative 2 another. They are comparative measures because they show relative value and allow financial analysts to compare information that could not be compared in its raw form.
What are ratios used to compare? One ratio to a related ratio The firm's performance to management's goals The firm's past and present performance The firm's performance to that of similar firms.
What do profitability ratios measure? Profitability ratios measure how much company revenue is eaten up by expenses, how much a company earns relative to sales generated, and the amount earned relative to the value of the firm's assets and equity.
What do liquidity ratios measure? Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
How do you calculate gross profit margin? (This is a Profitability Ratio) Gross Profit Margin = Gross Profit / Sales
How do you calculate operating profit margin? (This is a Profitability Ratio) Operating Profit Margin = Earnings before Interest and Taxes / Sales
How do you calculate net profit margin? (This is a Profitability Ratio) Net Profit Margin = Earnings Available to Common Stockholders / Sales
How do you calculate return on assets? (This is a Profitability Ratio) Return on Assets = Earnings Available to Common Stockholders / Total Assets
How do you calculate return on equity? (This is a Profitability Ratio) Return on Equity = Earnings Available to Common Stockholders / Common Equity
How do you calculate the current ratio? (This is a Liquidity Ratio) Current Ratio = Current Assets / Current Liabilities
How do you calculate the quick ratio? (This is a Liquidity Ratio) Quick Ratio = Current Assets Less Inventory / Current Liabilities
What are debt ratios? Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
How do you calculate the debt to total assets? (This is a Debt Ratio) Debt to Total Assets = Total Debt / Total Assets
How do you calculate the debt to equity? (This is a Debt Ratio) Debt to Equity = Total Debt / Equity
How do you calculate times interest earned? (This is a Debt Ratio) Times Interest Earned = EBIT / Interest Expense
What do asset activity ratios measure? Asset Activity Ratios measure how efficiently a firm uses its assets.
How do you calculate the average collection period? (This is an Asset Activity Ratio) Average Collection Period = Accounts Receivable / Average Daily Credit Sales
How do you calculate inventory turnover? (This is an Asset Activity Ratio) Inventory Turnover = Sales / Inventory
How do you calculate total asset turnover? (This is an Asset Activity Ratio) Total Asset Turnover = Sales / Total Assets
What do market value ratios measure? Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
How do you calculate P/E? (This is a Market Value Ratio) P/E = Market Price per Share / Earnings per Share
 

 



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