Financial Ratios Outline - Finance | FIN 3113, Study notes of Finance

Download Financial Ratios Outline - Finance | FIN 3113 and more Study notes Finance in PDF only on Docsity! Chapter 4 Lecture Outline I. Purpose of financial ratios  Analysis  Monitoring  Planning II. Basic categories of ratios LIQUIDITY-captures firm’s ability to meet short term obligations Short term obligations are reflected in the CL. These have to be paid off in the near term. To pay these off you need to have cash and sufficient “near-cash” items to discharge the liabilities as they come due. 1. Current ratio sliabilitieCurrent assetsCurrent What is the ideal current ratio? Problems with the current ratio? 2. Quick ratio (acid test) sliabilitieCurrent ceivableAccountsSecurityMktCash Re.  ASSET MANAGEMENT-Efficiency in using assets to generate sales 3. Average collection period 365/ Re salesCredit ceivableAccounts Ratio will depend upon industry and firm collection policies. Is a lower ratio always better? 4. Inventory turnover inventoryAverage SalesofCost Problems with the ratio:  Seasonal and fiscal year effects  Production process—subcontracting, just in time effects  Problems of high or low inventory turnover ratio 5. Fixed asset turnover assetsFixed Sales Ratio is affected by:  Cost of assets when acquired—age of assets  Depreciation method used  Extent to which assets are leased or owned. Extent of subcontracting.  Choice of technology—labor vs, capital intensive 6. Total asset turnover assetsTotal Sales FINANCIAL LEVERAGE MANAGEMENT—ability to meet short and long term debt obligations. Assess financial structure risk. 7. Debt ratio assetsTotal debtTotal 8. Debt-to-equity equityTotal debtTotal 9. Times interest earned eschInterest EBITtaxesanderestbeforeEarnings arg )(int Why is interest coverage a better measure of long term solvency than the debt or debt to equity ratio? Stock vs. flow concept.