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Working with Financial Statements Chapter 3 PowerPoint Presentation
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Working with Financial Statements Chapter 3

Working with Financial Statements Chapter 3

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Working with Financial Statements Chapter 3

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    1. All Rights Reserved Chapter 2 1 Working with Financial Statements Chapter 3 Financial Ratio Analysis DuPont Analysis Benchmarking Limitations and Cautions

    2. All Rights Reserved Chapter 2 Page 2 Financial Analysis Overview Managers and Investors are continuously analyzing company performance: Managers: compensation is driven by performance in areas of profitability and asset management. Investors: wealth is affected by company performance. Managers are primarily interested in 4 areas: Liquidity Management Asset Management Debt Management Profitability Management

    3. All Rights Reserved Chapter 2 Page 3 More on Financial Analysis Comparing [current to past] performance Where have we improved? Where do we need to improve? How do we compare to the best run companies in our industry? [benchmarking] Key Problem Areas Cost Management - key to profitability Asset Management right-sizing

    4. All Rights Reserved Chapter 2 Page 4 More on Financial Analysis Why is Benchmarking Important? Key to planning and strategy formulation. Setting performance standards and goals for improvement. Lets the personnel people know where they have to go to recruit top performers.

    5. All Rights Reserved Chapter 2 Page 5 Liquidity Management Liquidity ratios measure the company's ability to pay their bills: Accounts Payable, Notes Payable, Accrued Expense Current Ratio: $ in current assets per dollar of current liabilities. Quick Ratio: $ in quick assets per dollar of current liabilities. (Inventory - low liquidity) Desirable trends: depends on working capital strategy and market volatility.

    6. All Rights Reserved Chapter 2 Page 6 Asset Management Asset utilization ratios measure the efficiency of asset management. Inventory Turnover: increasing is good Days Sales Outstanding: decreasing is good Fixed Assets Turnover: increasing is good Total Assets Turnover: increasing is good

    7. All Rights Reserved Chapter 2 Page 7 Debt Management The extent to which assets and operating expenses are financed by borrowing money. Debt Ratio: stable over time, decreasing is good Times Interest Earned: increasing is good Fixed Charge Coverage: increasing good Many financial theorists favor borrowing Method for increasing return on equity Less expensive than equity

    8. All Rights Reserved Chapter 2 Page 8 Profitability Management Profits result when a firms expenses are less than its revenues. Profitability is a proxy measure for the firms ability to control costs. Gross Profit Margin (GPM) direct costs Operating Profit Margin (OPM) all operating costs Net Profit Margin (NPM) how much to bottom line Return on Total Assets (ROA) overall return Return on Common Equity (ROE) stockholders