Ratio analysis

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  • Financial ratios: relationships determined from firm's financial info and used for comparison purposes  - used to compare firms of diff sizes or same firm in diff periods of time
    • Short term solvency/ liquidity ratios : ability of firm to pay bills over the short run without undue stress - of interest to ST creditors
      • Current ratio: helps find the CA for every $1 of CL - must be more than 1
      • Acid test ratio: depends on the firm and how much inventory the firm has
      • Cash ratio:
      • NWC to total assets: low value means low level of liquidity
      • Interval measure: measures how long the business can run if the cash inflows dry up
    • Long term solvency measures: firm's ability to meet its financial leverage
      • Total debt ratio
      • Debt equity ratio:
      • Equity multiplier: 1 plus the debt equity ratio
      • Long term debt ratio: focuses on debt mgmt policy and not on trade prac
      • Times interest earned: how well a firm has its interest obligations covered
      • Cash coverage: firm's ability to generate cash from operations
    • Asset mgmt ratios: efficiency of a firm in using its assets to generate sales
      • Inventory turnover: how much time it takes to sell the inv
      • Receivables turnover: hwo fast we can collect sales
      • Asset turover ratios: measures *** much work we get out of our NWC
    • Profitability measures:focus on net inc
      • profit margin:how much profit for every dollar of sale
      • ROA: profit per dollar of assets
      • ROE: return for every dollar on equity
    • Mkt value measures:
      • Price earnings ratio: measures how much current investors are willing to pay per dollar of current earnings
      • Price sales ratio:
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