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Financial Statements and Analysis

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A = L + E

Categories of financial ratios:
profitability ratios (PM, ROA, ROE)
asset utilization ratios
liquidity ratios
debt utilization ratios

NI = net income
PM = profit margin / return on sales
PM = NI / sales

ROA = NI / total assets
ROA = PM x AT

AT = asset turnover
AT = sales / total assets

ROE = NI / shareholders’ equity
ROE = ROA / (1 – debt / total assets)

Current ratio = current A / current L
Quick ratio = ( current A – inventory ) / current L

Problems and limitations of financial ratio analysis:
# window dressing.
# firm operating in many different divisions.
# seasonal factors.

Window dressing: to hv a good liquidity ratio, a company can go to market to borrow a short term loan in the year end. To the outsider, this company seems very liquid.

Inflation rates drop, interest rates drop, good for stock prices.

How to boost ROE?
debt – but not always a positive influence.

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Written by blueroselady

November 25, 2009 at 2:34 pm

Posted in finance, study

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