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How Can We Assess and Explain Financial Performance?

How Can We Assess and Explain Financial Performance?. Financial Ratio Analysis. How can published financial statements be used to assess financial performance?. Financial Ratio Types. Market Value Profitability Asset Activity Leverage Liquidity. Market Value Ratios.

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How Can We Assess and Explain Financial Performance?

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  1. How Can We Assess and Explain Financial Performance?

  2. Financial Ratio Analysis How can published financial statements be used to assess financial performance?

  3. Financial Ratio Types • Market Value • Profitability • Asset Activity • Leverage • Liquidity

  4. Market Value Ratios • Examples: Market-to-Book; Price-Earnings • Questions: How do securities markets value the company’s assets? Earnings?

  5. Profitability Ratios • Examples: Return on assets, equity, invested capital; gross, net profit margin • Questions: How profitable is the company per dollar invested in the business; per dollar of sales?

  6. Asset Activity Ratios • Examples: asset turnover, average collection period, inventory conversion period, payables deferral period • Questions: How efficiently does the company use its assets? How long does it take assets or liabilities to turn into cash?

  7. Leverage Ratios • Examples: Debt/assets; Debt/equity; Interest coverage • Questions: How much of a burden does debt pose relative to assets, equity or cash flow? How risky is the company?

  8. Liquidity Ratios • Examples: Current ratio, quick ratio, interval measure • Questions: How easily can the company meet its immediate cash requirements? How risky is the company?

  9. Financial Ratios Relative to What? • By themselves, financial ratios have no meaning. We need to compare to: • Past data for the same company • Data for similar companies (e.g., same industry) • Other ratios (i.e., DuPont ratios, Cash Conversion Cycle)

  10. Does One Trend Coincide with Another?

  11. A Good Source of Company Ratios www.investor.reuters.com

  12. Dell and Gateway: Margin Trends

  13. Dell, Gateway and Computer Hardware

  14. DuPont Ratios Net Income x Sales x Assets = Net Income Sales Assets Equity Equity Net profit X Asset x Equity = ROE margin turnover multiplier

  15. DuPont Analysis: Selected Companies

  16. Cash Conversion Cycle: Selected Companies

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