Finance accounting financial statement analysis view

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17.1 Financial Ratios
Leverage Ratios Liquidity Ratios Efficiency Ratios Profitability Ratios

Financial Statement Analysis

17.2 17.3

The Du Pont System
Other Financial Ratios

Using Financial Ratios
Accounting Principles and Financial Ratios Choosing a Benchmark

Related Web Links
www.reportgallery.com Useful links to financial statements www.prars.com Another site with links tofinancial statements “Divide and conquer” is the only practical strategy for presenting a complex topic like financial management. That is why we have broken down the financial manager’s job into separate areas: capital budgeting, dividend policy, equity financing, and debt policy. Ultimately the financial manager has to consider the combined effects of decisions in each of these areas on the firm as awhole. Therefore, we devote all of Part 6 to financial planning. We begin in this chapter by looking at the analysis of financial statements. Why do companies provide accounting information? Public companies have a variety of stakeholders: shareholders, bondholders, bankers, suppliers, employees, and management, for example. These stakeholders all need to monitor how well their interests are beingserved. They rely on the company’s periodic financial statements to www.corporateinformation.com Includes links to financial statements of overseas companies www.jaxworks.com Calculates financial ratios http://finance.yahoo.com Contains financial ratio comparisons for companies and industries http://edgarscan.pwcglobal.com Very nice software for comparing financial ratios www.sternstewart.com Articles anddata on economic value added

17.4 17.5 17.6

Measuring Company Performance The Role of Financial Ratios Summary

Brealey−Myers−Marcus: Fundamentals of Corporate Finance, Fourth Edition

VI. Financial Planning

17. Financial Statement Analysis

© The McGraw−Hill Companies, 2003

Former CEO Jeffrey Skilling attempts to explain Enron’s accounts to Congress. Could better financialstatement analysis have prevented the Enron meltdown?
AP/Wide World Photos

provide basic information on the profitability of the firm. In this chapter we look at how you can use financial statements to analyze a firm’s overall performance and assess its current financial standing. You may wish to understand the policies of a competitor or the financial health of a customer. Or you may need to check your ownfirm’s financial performance in meeting standard criteria and to determine where there is room for improvement. We will look at how analysts summarize the large volume of accounting information by calculating some key financial ratios. We will then describe these ratios and look at some interesting relationships among them. Next we will show how the ratios are used and note the limitations of theaccounting data on which most ratios are based.

Finally, we will look at some measures of firm performance. Some of these are expressed in ratio form; some measure how much value the firm’s decisions have added. After studying this chapter you should be able to • Calculate and interpret measures of a firm’s leverage, liquidity, efficiency, and profitability. • Use the Du Pont formula to understand thedeterminants of the firm’s return on its assets and equity. • Evaluate the potential pitfalls of ratios based on accounting data. • Understand some key measures of firm performance such as market value added and economic value added.

Brealey−Myers−Marcus: Fundamentals of Corporate Finance, Fourth Edition

VI. Financial Planning

17. Financial Statement Analysis

© The McGraw−HillCompanies, 2003

450

Part Six Financial Planning

17.1 Financial Ratios
We have all heard stories of whizzes who can take a company’s accounts apart in minutes, calculate a few financial ratios, and discover the company’s innermost secrets. The truth, however, is that financial ratios are no substitute for a crystal ball. They are just a convenient way to summarize large quantities of financial...
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