ANALYSIS OF FINANCIAL STATEMENTS

C T IV ES
P T ER OBJE
CH A
 RATIO ANALYSIS

LIQUIDITY RATIO

ASSET MANAGEMENT
RATIO

DEBT MANAGEMENT
RATIO
PROFITABILITY
RATIO
MARKET VALUE
RATIO
 Shows the relationship of cash and
LIQUIDITY RATIO other current assets to its current
liabilities
INDUST
RY
AVERAG
E
4.2

INDUST
RY
AVERAG
E
2.2
 Measures how effectively firm is managing
ASSET MANAGEMENT RATIO
its asset

IND
U
AVE STRY
RAG
1 0.9 E

IND
U
AVE STRY
36 RAGE
day
s
 IND
U
AVE STRY
RAG
2 E
.8

IND
U
AVE STRY
RAG
1 E
.8
 Measures how effectively
DEBT MANAGEMENT RATIO
firm is managing its debt

IND
U
AVE STRY
RAG
36.4 % E

IN D
U
AVE STRY
RAG
6 E
.0
PROFITABILITY RATIO

- Group of ratios that show the

combined effects of liquidity, asset
management and debt on operating
results.

- Reflect the net result of all of the

firm's financing policies and operating
decisions.
PROFITABILITY RATIO
IND
U
AVE STRY
R
10 AGE
.0 %

IND
U
AVE STRY
RAG
5.
0% E
 IN
AV DUS
ER TR
9. A G Y
0 E
%

IN D
U
AVE STRY
RAG
15.0 % E

IND
U
AVE STRY
RAG
10.8 % E
 IND
U
AVE STRY
R
14 AGE
.2 %
PROBLEM

A company has $20 billion of sales and

$1 billion of net income. Its total
assets are $10 billion. The company's
total assets equal total invested
capital, and its capital consists of
half debt and half common equity. The
firm's interest is 5% and its tax rate
is 40%.
MARKET VALUE RATIO

- The market value ratios are used in

three primary ways:

(1) by investors when they are deciding

to buy or sell a stock
(2) by invetment bankers when they are
setting the share price for a new stock
issue(an IPO)
(3) by firms when they are deciding how
much to offer for another firm in a
potential merger
MARKET VALUE RATIO

INDU
S
AVE TRY
RAG
E
11.3
INDU
S
AVE TRY
RAG
E
1.7
Typing The Ratios Together:
The DuPont Equation

It shows the relationship among aseet

management, debt management, and probability
ratios.
POTENTIAL MISUSES ROE
ROE

RISK SHAREHOLDER VALUE

CAPITAL
INVESTMENT
USING FINANCIAL RATIOS TO ASSESS
PERFORMANCE

COMPARISON TO
BENCHMARK
INDUSTRY AVERAGE

TREND ANALYSIS