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Words 1702

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Interpretation of liquidity Ratios

In order to survive, firms must be able to meet their short-term obligations—pay their creditors and repay their short-term debts. Thus, the liquidity of the firm is one measure of a firm's financial health. Two measures of liquidity are in common:

Current ratio = current assets / current liabilities The main difference between the current ratio and the quick ratio is that the latter does not include inventories, while the former does. Which ratio is a better measure of a firm's short-term position? In some ways, the quick ratio is a more conservative standard. Quick ratio = (cash + marketable securities + net receivables) / current liabilities

If the quick ratio is greater than one, there would seem to be no danger that the firm would not be able to meet its current obligations. If the quick ratio is less than one, but the current ratio is considerably above one, the status of the firm is more complex. In this case, the valuation of inventories and the inventory turnover are obviously critical. A number of problems with inventory valuation can contaminate the current ratio. An obvious accounting problem occurs because organizations value inventories using either of two methods, last in, first out (LIFO) or first in, first out (FIFO). Under the LIFO method, inventories are valued at their old costs. If the organization has a substantial quantity of inventory, some of it may be carried at relatively low cost, assuming some inflation in overall prices. On the other hand, if there has been technical progress in a market and prices have been falling, the LIFO method will lead to an overvalued inventory.

Under the FIFO method of inventory valuation, inventories are valued at close to their current replacement cost. Clearly, if we have firms that differ in their…...

...Financial Ratios & Other Financial Analysis Tools Here is a list of many ratios used to analyze a company's financial condition - along with an explanation of why they are considered to be important. Liquidity Ratios * Current Ratio * Acid Test Ratio * Average Collection Period Coverage Ratios * Times Interest Earned * Net Income + Non-cash Exp / Current Portion of LT Debt Leverage Ratios * Fixed Assets / Tangible Net Worth * Debt to Tangible Net Worth | Operating Ratios and Indicators * Gross Profit Margin * EBT / Tangible Net Worth * EBT / Total Assets * Fixed Asset Turnover Ratio * Total Asset Turnover Ratio * E.B.I.T.D.A. ("Ebitda") Expense to Revenue Ratios * % Depreciation, Depletion & Amortization / Revenue * Officers' &/or Owner's Compensation / Revenue Ratio Fusion! * Altman's Z-Score for Privately Held Firms | Banks often use ratios in loan contracts with benchmarked minimums or maximums (aka 'Covenants'). Even if covenants are not listed in your loan contract, banks still look at them. You will add credibility to your financial statements if you include financial ratios and indicators in your presentation to the bank. They will think you use these indicators internally, and they'll love you for it! Actually; If you're not using Financial Analysis Tools and Benchmarks internally, you should strongly consider it. LIQUIDITY RATIOS Liquidity ratios......

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...BWFF1013 GROUP PROJECT (15 MARKS) Topic : Assessing Firm’s Financial Performance (Topic 3) Type of analysis : Trend Analysis (3 years) Period of analysis : 2010 - 2012 INSTRUCTION: 1. This project must be written in Times New Roman 12-pt. font and double spaced, and submitted as a Microsoft Word document. 2. Any projects that show evidence of PLAGIARISM will result a grade of ZERO for all group members. Plagiarism is a serious offence and it will not be tolerated. 3. Submit this project using the project format provided: i. Hardcopy (printed) format; and ii. Softcopy (saved in CD) format to detect for plagiarism. 4. The due date for submission of the project is 18th April 2013. Late submission will be penalized according to the rules. 5. Failure to comply these instructions will affect the evaluation of your marks in this project. OBJECTIVES: By doing this project, the students will be able to: 1. calculate the financial ratios, 2. explain the use of financial ratios, 3. value the company’s perfromance and 4. get themselves familiar with the real practice of industry financial statndards. REQUIREMENT: Students will work on the project collaboratively in groups of four (4) or five (5) students. Each group must choose a company listed on Bursa Malaysia MAIN BOARD. Students will download the relevant financial data from the internet and perform ratio analysis for the selected companies. The company MUST be selected......

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...Important Ratios and Their Interpretation Type | Name of Ratio | Calculation | What it Tells You | Market Test | Price Earnings Ratio (PE Ratio) | Market price per share Earnings per share | A measure of expected company growth. A high PE Ratio means investors believe the company has a higher earnings potential | Profitability | Financial Leverage | Average Total Assets Average Stockholders Equity | How are assets financed? Higher number means higher debt | Profitability | Total Asset Turnover | Sales Average Total Assets | Measures sales generated per dollar of assets. Higher generally means more efficient use of assets in generating sales. | Profitability | Net Profit Margin | Net Income Net Sales | How much of each sales dollar ends up as profit? Varies by industry and efficiency. | Profitability | Return on Equity | Net Income Average Stockholders Equity | How much profit was generated for each collar of SH Equity | Profitability | Gross Profit Percentage | Net Sales-COGS (Gross profit) Net Sales | What percent of sales is left over after inventory costs and other costs are paid and have profit | Liquidity | Receivables Turnover | Net Sales Average Accounts Receivable | How many times were average receivables collected? Higher turnover is faster and fewer days. | Profitability | Return on Assets | Net Income + Interest Expense (net of tax) Average Total Assets (Cy + LY)/2 | Measures......

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...Ratio and Financial Statements Analysis Kimberly Y. Gruber University of Maryland University College Dr. Sunando Sengupta 07/25/2013 Turnitin Score: 23% Executive Summary The purpose of this paper is to examine ratio and financial statement analysis. Such analysis is a useful tool for managers and stakeholders to evaluate a company’s financial health in order to identify opportunities for growth and areas of weakness so as to institute corrective measures. Financial statements are used in order to predict trends of cash flow within the business as well as predict the potential of a business and if they are capable of financial growth. Ratio analysis examines the probability of a company’s profit or a company’s loss. This paper will examine the benefits and limitations of ratio analysis, explain what factors impact the meaningfulness of such measures and what new practices or theories may be emerging regarding the application of ratio and financial statement. The paper concludes that ratio and financial statements is an essential tool used in analyzing a company’s profit. Introduction to Ratio and Financial Statement Analysis Though there are various methods for monitoring the liquidity of businesses the most common has been the use of financial ratios. Ratio analysis is an established technique—involving the relationship between two or more variables--that is used to conduct qualitative analysis of information contained in a company’s financial statement......

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...ISOM 249 Functions and Purposes of Financial Ratios I. Functions of Financial Ratios Financial ratios can be used to show a company’s: • Position in its industry (industry comparisons) • Accomplishment of objectives (objective comparisons) • Vulnerability in the economy (time-series/trend analysis) • Future borrowing power and growth potential (leverage ratios) • Ability to react to unforeseen external changes (price/earnings ratio) II. Types of Ratios and Their Purposes • Profitability ratios indicate how well a company allocates its resources in relation to income generated. • Liquidity ratios measure whether a company is able to pay its bills. • Leverage ratios show how a company’s operations are financed. • Activity ratios measure a company’s productivity and efficiency. • Price/earnings (P/E) ratio reflects investors’ estimations of how well the company will be able to cope with unforeseen changes. III. Absolute Standards for Business Performance In many organizations, minimum financial ratios are used to serve as absolute standards for their performance as follows: • Profitability: net profit no less than 3% • Liquidity: current ratio greater than one • Leverage: long-term debt to total equity less than one • Activity: average collection period less than 60 days IV....

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...Financial Ratio Analysis It is difficult to infer organizational performance from one or two simple numbers. Nevertheless, in practice a number of different ratios are often calculated in strategic planning endeavors and, taken as a whole and with some caution, these ratios do provide some information about the relative performance of an organization. In particular, a careful analysis of a combination of these ratios may help you to distinguish between firms that will eventually fail and those that will continue to survive. Evidence suggests that, as early as five years before a firm fails, one may be able to detect trouble from the value of these financial ratios.1 In this note, the basic financial ratios are reviewed, and some of the caveats associated with using them are highlighted. The ratios tend to be most meaningful when they are used to compare organizations within the same broad industry, or when they are used to make inferences about changes in a particular organization's structure over time. LIQUIDITY RATIOS In order to survive, firms must be able to meet their short-term obligations—pay their creditors and repay their short-term debts. Thus, the liquidity of the firm is one measure of a firm's financial health. Two measures of liquidity are in common: Current ratio = current assets / current liabilities Quick ratio = (cash + marketable securities + net receivables) / current liabilities The main difference between the......

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...Techniques Chapter Outline I. II. Introduction: The Necessity for Coordinating Bank Asset and Liability Management Decisions Asset/Liability Management Strategies A. Asset Management Strategy B. Liability Management Strategy C. Funds Management Strategy Interest Rate Risk: One of the Greatest Asset-Liability Management Strategy Challenges A. Forces Determining Interest Rates B. The Measurement of Interest Rates 1. Yield to Maturity 2. Bank Discount Rate C. The Components of Interest Rates 1. Risk Premiums 2. Yield Curves 3. The Maturity Gap and the Yield Curve D. The Response of Banks and Other Financial Firms to Interest Rate Risk One of the Goals of Interest-Rate Hedging A. The Net Interest Margin B. Interest-Sensitive Gap Management 1. Asset-Sensitive Position 2. Liability-Sensitive Position 3. Interest-Sensitive Gap III. IV. 75 V. VI. VII. VIII. 4. Interest Sensitivity Ratio 5. Computer-Based Techniques 6. Strategies in Gap Management The Concept of Duration A. Definition of Duration B. Calculation of Duration C. Net Worth and Duration D. Price Risk and Duration E. Convexity and Duration Using Duration to Hedge Against Interest-Rate Risk A. Duration Gap 1. Dollar Weighted Duration of Assets 2. Dollar Weighted Duration of Liabilities 3. Positive Duration Gap 4. Negative Duration Gap B. Change in the Bank’s Net Worth The Limitations of Duration Gap Management Summary of the Chapter Concept Checks 6-1. What do the following terms mean: Asset......

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...Evaluation & Alternatives ---------------------- According to the chapter of financial ratio, the Operating Profit Margin, Net Profit Margin and Return on assets and equity had downward trend since 2008, will drop to its record low in 2013, then upward trend afterwards. However, the Gross profit Margin will be kept as same as that before expansion. Moreover, Efficiency of Cash Management will be done better on rise of Creditor Ratio despite Debtor Ratio will go up. This can be improved by adjustment of period in accounts receivable during 2013-17. Furthermore, the Liquid Ratio and Current Ratio will steady grow stating higher realization ability of corporate assets after expansion. What’s more, the D/E Ratio and Basic Earnings per Common Share will boom. Despite, the productivity will not be looking good. The Inventory Turnover will fall to 2.5 which is 19.61% lower than average value in 2008-12. The Total Asset Turnover will decrease its lower level while the Average Collection Period will reach to the higher level. And the Debt ratio will maintain in risky level. Don’t forget, extra 400 stores & £100M-worth-new equips and stocks will be bought. When look into the balance sheet, there are negative cash £21,493.24 and £6,406.51 in year 2013 and 2014 respectively. The extra £279 million needed to maintain healthy capital structure. The alternatives are as follows. 1. Right issue - Issue of rights to buy additional securities in a company made to the company's......

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...Finland The Review of the Theoretical and Empirical Basis of Financial Ratio Analysis Revisited With the Modern Developments in the Web-Based Publishing Abstract This web-based publication is an addendum to a previous review of the research and research trends in financial ratio analysis. The first purpose is to add more current references to the previous review. The second purpose is to emphasize the changes facilitated by the modern World Wide Web based publication practices and their impact on the availability of scientific publications. The new references are listed only without detailed reviewing, since no drastic additions have come to the fore in the field. However, it is felt that the additions are sufficient to warrant this addendum made readily possible by the option of making this publication available online. Keywords: Financial statement analysis, financial ratios, review, electronic publishing Referencing: Salmi, Timo, Jussi Nikkinen & Petri Sahlström (2005). The Review of the Theoretical and Empirical Basis of Financial Ratio Analysis Revisited. University of Vaasa, Finland. URN:NBN:fi-fe20051937. Available from World Wide Web: <URL:http://www.uwasa.fi/~ts/wbfa/wbfa.htm>. Acknowledgements for useful discussions: Prof. Ilkka Virtanen and Library Managing Director Vuokko Palonen. Purpose Salmi and Martikainen (1994) presented a review of the theoretical and empirical basis of financial ratio analysis. In particular, the review sought to answer......

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...Handout 6 Analyzing Your Financial Ratios Taken from http://www.va-interactive.com/inbusiness/editorial/finance/ibt/ratio_analysis.html Overview Any successful business owner is constantly evaluating the performance of his or her company, comparing it with the company's historical figures, with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of your company's effectiveness, however, you need to look at more than just easily attainable numbers like sales, profits, and total assets. You must be able to read between the lines of your financial statements and make the seemingly inconsequential numbers accessible and comprehensible. This massive data overload could seem staggering. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify and quantify your company's strengths and weaknesses, evaluate its financial position, and understand the risks you may be taking. As with any other form of analysis, comparative ratio techniques aren't definitive and their results shouldn't be viewed as gospel. Many off-the-balance-sheet factors can play a role in the success or failure of a company. But, when used in concert with various other business evaluation processes, comparative ratios are invaluable. This discussion contains descriptions and examples of the eight major types of ratios used in financial analysis: Income,......

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...RSM1320 – Financial Accounting FINANCIAL ANALYSIS TECHNIQUES (RATIO ANALYSIS) KEY POINTS TO KNOW 1) Financial analysis is ultimately contextual and purpose-driven. In other words, there is always a reason why you are performing the analysis. You need to be clear about the objective of the analysis. 2) The tools and techniques that you use will depend on your purpose. As we discussed earlier, analyzing the company as an investment opportunity (which generally focuses on indicators of profitability of growth) is often different from analyzing the company from the perspective of a credit (lend or not) decision (which generally focuses on indicators of risk, liquidity, and solvency). 3) Financial analysis will seldom provide an “answer” to your objective or starting question (e.g. invest or not, lend or not). The usefulness of financial analysis is to provide valuable insights and additional questions to ask in arriving at a particular decision. Each individual ratio is a basic “indicator”, but it does not by itself provide an explanation of “why” something happened. To get the most value out of financial analysis, you need to understand how these ratios relate to one another and to the business model (and industry) of the company you are analyzing. This requires experience. 4) There is no single authoritative source providing rules about how particular ratios are calculated. While there are standards of practice (that we will follow), there is also significant...

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...01 technical the use of comparisons in In the Paper F8 exam you may be asked to compute and interpret the key ratios used in analytical procedures at both the audit planning stage and when collecting audit evidence. RELEVANT to ACCA QUAlification paper F8 In the Paper F8 exam you may be asked to compute and interpret the key ratios used in analytical procedures at both the audit planning stage and when collecting audit evidence. Ratios and comparisons can be used to identify where the accounts might be wrong, and where additional auditing effort should be spent. Calculating a ratio is easy, and usually is little more than dividing one number by another. Indeed, the calculations are so basic that they can be programmed into a spreadsheet. The real skill comes in interpreting the results and using that information to carry out a better audit. Saying that a ratio has increased because the top line in the calculation has increased (or the bottom line decreased) is rather pointless: this is simply translating the calculation into words. Use the mnemonic RATIO to remind yourself to keep asking the following questions: ¤ Reason – why has this change occurred? ¤ Accident – is the change real or simply an accident of timing? ¤ Test – what can be done to test our conclusions? What other work should we do? ¤ Implications – what does this change mean? Liquidity crisis? Poor management etc? ¤ Other information – is this consistent......

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...[pic] [pic] Report on Beximco Pharmaceutical. (Ratio Analysis) Course: Financial Management. Submitted To: NAFEESA TABASSUM Submitted By: Nahar Kamrun 07-07812-1 Islam Mohammad Ariful 07-08748-2 Ashfaq Ahmed 06-07395-3 Akter Tanzina 06-07500-3 Islam neamul 06-07469-3 Date of Submission: 25 November 2008 1. Current ratio: Current ratio shows how a company manages its current asset over short term liability. Current ratio provides the best single indicator of the extent to which the claims of short term creditors are covered by assets that are expected to be converted to cash fairly quick, it is the most commonly used measure of short term solvency. Beximco pharmaceutical has current ratio 1.40 times in 2005, 1.33 times in 2006 and 1.80 times in 2007.It’s ratio is basically sound in 2007 than lower ratio in 2006. The higher the current ratio, the greater the ability to pay its bills however increasing Liquidity shows the poor management in sales and investment. But Beximco has moderate current ratio in 2007. So the company is efficient to manage its asset over current liability. 2. Quick/Acid test ratio: Quick/acid test ratio measure of the firm’s ability to pay off short-term obligations. For......

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...different financial ratios from your text, course materials, and/or Web resources. * Answer the following questions: * What do they tell you about a firm? * Why is it important for a bank to understand these financial ratios? * Why is it important for an investor to understand these financial ratios? * Post a new topic to the Discussion Board that contains your answers to the above questions Financial ratios are measurements used to analyze entities of financial performance. They are several financial ratios one can choose from, the main four are; profitability ratios, efficiency ratios, liquidity ratios and solvency ratios. Each ratio has different rules and they perform in their own ways. They are important tools that evaluate the profitability, efficiency, liquidity and solvency of an entity of the firm. Profitability ratios help users of an entity financial statements determine the overall effectiveness of management regarding returns generated on sales and investments (Manley, 2009). Normally used profitability ratios are gross profit margin, operating profit margin and net profit margin. Gross profit margin measures profitability after considering cost of goods sold, while operating profit margin measures profitability based on earnings before interest and tax expense. One margin that’s often referred to as the bottom line and takes all expenses into account is the Net profit margin (Manley, 2009). Efficiency ratios are known as the......

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...Use this Excel spreadsheet to compute ratios; show your computations for all ratios on this tab and also include your commentary. The financial statements used to calculate these ratios are available in Appendix A and Appendix B of your textbook. Oracle Microsoft Interpretation and Comparison between the two companies' ratios (Reading the Appendix of Chapter 13 will help you) Earnings per share As given in the income statement $0.83 $1.44 "Comparing these numbers is not meaningful since the number of shares outstanding differs. " Current ratio Current assets $12,883 = 1.37 $40,168 = 1.69 Microsoft has $3.45 in current assets for every $1 dollar in current liabilities while Hershey only has 88 cents. Microsoft has much greater liquidity based on this ratio. Current liabilities $9,404 $23,768 Gross Profit Ratio Gross profit $2,024 = 48.6% $1,631,569 = 33.0% Only product sales were used for the Microsoft calculation since Hershey does not have rental and royalty revenue. This ratio indicates that Microsoft has a slight edge for this profitability ratio because of its ability to maintain an adequate selling price above its cost of goods sold. Net Sales $4,163 $4,946,716 Profit margin ratio Net Income $967 = 23.2% $214,154 = 4.3% Total revenue was used for the base in Microsoft's profit margin calculation because they also have rental and royalty......

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