Working with Financial Statements

Working with Financial Statements

1. Ratio Analysis

   • A ratio is a number divide by another
   • Financial ratios: Relationships determined from a firm's financial information and used for comparison purposes
   • Financial ratios are traditionally grouped into 5 categories
     • Short-term Solvency, or Liquidity,
       • Current ratio:  Current assets/Current liabilities
       • The primary corcern is the firm's ability to pay its bills over the short run without undue stress. These ratios focus on current assets and current liabilities
     • Long-term solvency, or financial leverage, ratios
       • Are intended to address the firm's long-term ability to meet its obligations, or, more generally, its financial levearage
     • Asset management, or turnover, asset utilization, ratios
       • They are intended to describe how efficiently or intensively a firm uses its assets to generate sales
     • Profitability ratios
       • They are intended to measure how efficiently a firm uses its assets and manages its operations. the focus on this group is on the bottom line, net income
     • Market value ratios
       • Is based on information contained in the market price per share of stock. These measures can be calculated directly only for publicity traded companies