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1、Financial Analysis3Chapter OutlineRatio analysis and its importanceUse of ratio for measurementsThe DuPont system of analysisTrend analysisEvaluation of reported income to identify distortion2Ratio AnalysisFinancial ratiosUsed to weigh and evaluate the operating performance of a firmUsed to compare
2、performance record as against similar firms in the industryAnalyzing ratios and numerical calculationsSuch data is provided by various organizations3Ratios and their ClassificationA.Profitability ratios1. Profit margin2. Return on assets (investment)3. Return on equityB.Asset utilization ratios4. Re
3、ceivable turnover5. Average collection period6. Inventory turnover7. Fixed asset turnover8. Total asset turnover4Ratios and their Classification (contd)C.Liquidity ratios 9. Current ratio10. Quick ratioD.Debt utilization ratios11. Debt to total assets12. Times interest earned13. Fixed charge coverag
4、e5Types of RatiosProfitability ratiosMeasurement of the firms ability to earn an adequate return on:SalesAssetsInvested capitalAsset utilization ratiosMeasures the speed at which the firm is turning over accounts receivable6Types of Ratios (contd)Liquidity ratiosEmphasizes the firms ability to pay o
5、ff short-term obligations as and when dueDebt utilization ratiosEstimates the overall debt position of the firmEvaluates in the light of asset base and earning power7Financial Statement for Ratio Analysis8Profitability Ratios9DuPont System of AnalysisA satisfactory return on assets might be derived
6、through:A high profit marginA rapid turnover of assets (generating more sales per dollar of its assets)Or bothReturn on assets (investment) = Profit margin Asset turnover 10DuPont System of Analysis (contd)A satisfactory return on equity might be derived through:A high return on total assets A gener
7、ous utilization of debtOr a combination of bothReturn on equity = Return on assets (investment) (1 Debt/Assets)11DuPont Analysis12Return of Wal-Mart versus Macys using the Du Pont method of analysis, 200713Asset Utilization RatiosThese ratios relate the balance sheet to the income statement14Asset U
8、tilization Ratios (contd) 15Liquidity Ratios 16Debt Utilization RatiosMeasures the prudence of the debt management policies of the firm17Debt Utilization Ratios (contd)Fixed charge coverage measures the firms ability to meet the fixed obligations Interest payments alone are not consideredIncome befo
9、re interest and taxes.$550,000Lease payments $50,000Income before fixed charges and taxes$600,000 18Ratio Analysis19Trend Analysis20Trend Analysis in the Computer Industry21Impact of Inflation on Financial AnalysisInflationRevenue is stated in current dollarsPlant, equipment, or inventory may have b
10、een purchased at lower price levels Profits may be more a function of increasing prices than due to good performance22Comparison of Replacement and Historical Cost Accounting23Comparison of Replacement and Historical Cost Accounting (contd)Replacement cost reduces income but increases assetsAn incre
11、ase lowers the debt-to-assets ratioA decrease indicates decrease in the financial leverage of the firmA declining income results in a decreased ability to cover interest costs24Impact of Disinflation on Financial AnalysisDisinflationFinancial assets such as stocks and bonds have the potential to do
12、well encouraging investorsTangible assets do not have the potentialDeflationActual reduction of prices affecting everybody due to bankruptcies and declining profits25Other Elements of Distortion in Reported IncomeEffect of changing pricesReporting of revenuesTreatment of nonrecurring itemsTax write-off policies26Income Statements27Explanation of Discrepancies (contd) SalesFirm may defer recognition until each payment is received or full recognition at earliest possible dateCost of goods soldUse of different accounting principles LIFO
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