Ch.3 Working with Financial Statements

Profitability ratios all have the same figure in the numerator. What is it? What do these ratios measure? How do you interpret the results?

the numerator is Net Income for both return on assets= Net income/total assets and return on equity= net income/total equity. --return on assets is s measure of profit per dollar of assets. --return on equity is a measure of how the stockholders fared during the year. --you interpret the results in percentages or ROE for every dollar in equity Prufrock generated 14 cents in profit.

Turnover ratios all have one of two figures as the numerator. What are these two figures? What do these ratios measure? How do you interpret the results?

the numerator is sales for both Fixed asst turnover= sales/Net Fixed Assets and Total Asset turnover= sales/ total assets

What are some problems that can come up with financial statement analysis?

there is no underlying theory to help us identify which quantities to look at and to guide us in establishing benchmarks. Such companies/ businesses can be conglomerates ( not all subsidiaries under the same line of business)

Given the total debt ratio, what other two ratios can be computed? Explain how.

total debt ratio= total assets - total equity/ total assets the debt-equity ratio ex. =total debt/total equity...$.28/$.72 and equity-multiplier ex. = total assets/ total equity...$1/ $.72

Return on equity or ROE, can be expressed as the product of three ratios. Which three?

1. Operating efficiency ( as measured by profit margin) 2. Asset use efficiency (as measured by total asset turnover) 3. Financial Leverage ( as measure by the equity multiplier)

Return on assets or ROA can be expressed as the product of two ratios which two?

1. Profit Margin 2. Total Asset Turnover

What are the five groups of ratios? Give two or three examples of each kind.

1. short-term solvency, or liquidity, ratios -- current ratio=current assets / current liabilities -- quick ratio= current assets-inventory/ current liab. 2. long-term solvency, or financial leverage, ratios. --total debt ratio=TA-TE/TAssets 3. asset management, or turnover, ratios. 4. profitability ratios 5. market value ratios.

What are some uses for financial statement analysis?

INTERNAL: performance evaluations , future EXTERNAL: useful to parties outside the firm, evaluate suppliers and suppliers would review our statements before deciding to extend credit to us., how likely your business will be around in the future. Financial statements are a prime source of information about a firm's financial health.

What are SIC codes and how might they be useful?

SIC codes are four-digit codes established by the U.S. Govt. for statistical reporting. They are useful in which when you are trying to do a quick scan the first two digits will be related to the same type of business such as agricultural, services, retail trade etc.

Why do we say that financial statement analysis is management by exception?

a deteriorating time trend may not be bad, but it does merit investigation.