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Analysis of Financial Statements (Capital Structure (Is the company…
Analysis of Financial Statements
Ratio Analysis
Important information for investment such as liquidity, profitability, and efficiency.
Helps compare entities
DONT MEMORIZE RATIO FORMULAS, UNDERSTAND THEM
Limitations
Quality of data
Policy choices
Benchmarks for comparison
Prior periods
Competitors
Industry averages
Liquidity
Can the company meet debts as they fall due?
2 Ratios
Current Ratio (working capital)
Quick Ratio (acid test)
how fast can assets be converted into cash in order to pay current liabilities
Market Performance
What returns are shareholders receiving
Dividend per share
Payout Ratio
Subjective
Capital Structure
Is the company financed by debts and equity?
Interest coverage ratio
Debt ratio
Equity ratio
Debt to equity ratio
Company's ability to survive over time
Profitability
Is the company profitable?
Return on equity
Return on assets
Efficiency
Are the companies assets being used efficiently
Days inventory
Days debtor
Asset turnover