Chapter 14 ANALYSIS OF FINANCIAL STATEMENTS Chapter 14 Questions Questions to be answered: What are the major financial statements provided by firms and what specific information does each of them contain?
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ANALYSIS OF FINANCIAL STATEMENTS
Questions to be answered:
Receivables turnover can be converted into an average collection period
Given the turnover values, you can compute the average inventory processing time
CCC = Receivables Collection Period
+ Inventory Processing Period
- Payables Payment Period
Margin Turnover Leverage
=Operating Profitability Ratios
This is the operating profit return on total assets. To consider the negative effects of financial leverage, we examine the effect of interest expense as a percentage of total assets
We consider the positive effect of financial leverage with the financial leverage multiplier
This indicates the pretax return on equity. To arrive at ROE we must consider the tax rate effect.
Two primary determinants of business risk
Interest Coverage = EBIT/Interest Expense
Always consider relative financial ratios