Sources of Financial Information For the most part, our discussion in this chapter has been limited to the kinds of analysis that can be performed by external users who do not have access to the company’s accounting records. Investors and creditors must rely to a considerable extent on the financial statements published in annual quarterly…
The current ratio expresses the relationship between current assets and current liabilities. As debts come due, they must be paid out of current assets. Therefore, short-term creditors frequently compare the amount of current assets with the amount of current liabilities. The current ratio indicates a company’s short-run debtpaying ability. It is a measure of liquidity…
term creditors are interested in the percentage of total assets financed by debt, as distinguished from the percentage financed by stockholders. The percentage of total assets financed by debt is measured by the debt ratio. which was computed on the preceding page. From a creditor’s viewpoint, the lower the debt ratio the better, since this…
An important test of management’s ability to earn a return on funds supplied from all sources is the rate of return on total assets. Tbc ‘income figure used in computing this ratio should’ be operating income, since in test expense and income taxes are determined by factors other than the efficient use of resources. Operating…
Now that we have learned several techniques that are useful in better understanding an enterprise’s financial statements, we will do a comprehensive analysis of a company. This illustration draws from material presented in ‘this as well as. from information presented earlier in the text. We take a comprehensive look at the analysis of financial statements…
Most successful businesses earn a return on average total assets of, perhaps, 15% or more. At this writing, businesses’ must pay interest rates of between 6% and 12% in ‘ order to borrow money. if a business is well managed and has good future prospects, management should be able to earn a return on assets…
‘Most equity investors consider net income (or net loss) to he the most important figure in the income ,statement. This amount represents the overall increase (or decrease) in owners’ equity resulting fromall profit-directed activities during the period. Financial analysts often compute net income as.a percentage of net sales (net income divided by net sales). This…
Measures of a company’s profitability are of interest primarily to equity investors and management, and are drawn from the income statement. The measures that we discuss’ in this chapter include percentage changes in key measurements, gross profit rates, operating income, net income as a percentage of sales, earnings per share, return on assets, and return…
Financial analysts generally use two criteria in evaluating the reasonableness of a financial ratio. One criterion is the trend in the ratio over a period of years. By reviewing this trend, analysts are able to determine whether a company’s performance or financial position is improving or deteriorating. Second;analysts often compare a company’s financial ratios with…
‘Working capital is a measurement’ often used to express the”Relationship between cur- ‘rent assets and current liabilities. Working capital is the excess of current assets over . current liabilities. Computer Barn’s working capital amounts to $80,000, computed as follows Recall that current assets are expected to convert into cash within a relatively short period of time,…
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