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## Financial Ratio Analysis

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**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**• Examples: Market-to-Book; Price-Earnings • Questions: How do securities markets value the company’s assets? Earnings?**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?**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?**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?**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?**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)**A Good Source of Company Ratios**www.investor.reuters.com**DuPont Ratios**Net Income x Sales x Assets = Net Income Sales Assets Equity Equity Net profit X Asset x Equity = ROE margin turnover multiplier