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which Is good, or exccssivc cash, which Is h~d (becauseQexcess cash in the bank Is a noncarnin~ a;:~t). Similarly, a high fixed ~tsscts turnover ratio might (lenote eithcra firm f!at
ti~ces its assets efficiently or OflC that is undercapitallied and cannot afl~utl to htiv enough i~sets.
8. A firm might havc some ratios that look ‘g it I ‘aiid others that look “bad,’ making it dIfficult to i’f I
~i

w1’rtI~-r ike company is, ~in balance, strong or weak. Stalislical proccdiir~ ci he ur-li to analyze the net effects ofa set of ratios and thereby clarify i hr i’’ Many banks and ~thcr
5 lending organizatiims use statistical Pro(’ lni c~ i .in;ilvzc firms’ fitiancial ratios, and, on the basis (if their analyses, classify mp:’iiics according to their probability of getting into
11-nancial trouble.’’

Ratio analysis i~ nd ~, ilit .i,ialvsts should hr ~v

I ie
1~ of these problems and make adjustments as ll~t c~.iiv \\hen conducted in a mechanical, unthinking man• ncr, however, this tyI)r
of ammalvsis is dangcro’ms. Used intelligently and with good
0 judgment, it can pu sii Ic •‘;rIi II insights into a firm’s OpCF.~! iOflS. Probably the most i~nJfl)?iaflt and uz~ st 1b1// lilt itifirti to Sl1(CI~\/?i/ 1(1(1(1 (liUil)’S,S is tbeju~gment used wI.wn
tut’?/:nfi’i’ 11w ;i’.iiffc to rear!; an (11(74111 co7ic1usio~j about the Jirni ‘sfiizancial f~ ~ ft/
F’Jarne Ifl1ts~ ~ cf i~,r,c ~ii if~’~’. \~Vh~~i I~ of i~i
ii each group ~r~lIc~.’~c
List ~r,vor(1! potential 1 s’.~I ftllII OiiOI’~~i.S.

15

20

25

30

35

40 h’ trd,nu1iic used i~ 411,1 (hr Ii ~ii%~’uit at l)SIS. II, dls~ U.5i4 ii 1 this icchnique, see Edward 1.
Ali,ii~ti, IiI);1tI~i4I flat in,, lr~ IlI’IItIl Aii~it~:.ls, and the Pi rdi:tion of Corporate Bankruptcy,Journal of (ii.~,tur, September 1%!,5fl~) (‘~),ftr Pii~tne Fflrighirn arid rhinip L Davcs..~tterrnvdMte Fin~nda1 ~ fi:??~rrinj~flt, 7th ed. (thu
lillIll I, ‘71 5 tuil, V r5urrn ( iIlr~ rimbil~hIn~, 2002),Cliapter 24.