financial statement

> Is the process of examining relationships among elements of the company’s accounting statements or financial statements and making comparisons with relevant information

 Financial

Ratios are measures of relative values of key financial information.

 Ratio

Analysis involves methods of calculating and interpreting financial ratios to assess the firm’s performance.

 Ratios

are measured as (1) percentages; (2) times or multiples; and (3) number of days.

 Ratios

are of interest as key indicators of financial health to:
 shareholders,
 creditors,
 management,

and
 prospective investors.
 Ratio

analysis directs attention to potential areas of concern, but are not conclusive evidence of problems.

 Cross-Sectional

Analysis involves the comparison of different firms at the same time.


Benchmarking firm performance against industry averages is very popular.

 Time-Series

Analysis evaluates performance over time, allowing for comparisons of current and past ratio values.

 Combined

Analysis mixes both features of
Cross-Sectional and Time Series Analysis.

 Ratios







are grouped into five basic categories:

liquidity ratios, activity ratios, leverage ratios, profitability ratios, and;
Market ratios

Ratio Analysis Example
Bartlett Company

refers to the firm’s ability to satisfy its short-term obligations as they come due.

 Liquidity

 Three

areas are of particular concern:

Net Working Capital,
 The Current Ratio, and




The Quick (Acid-Test) Ratio.

 This

measure of liquidity is simply a measure of current assets minus liabilities.

Net Working Capital = Current Assets – Current
Liabilities

Ratio measures the firm’s ability to meet it’s short-term obligations.

 Current

 Generally,

the higher the current ratio, the more liquid the firm is considered to be. current ratio’s acceptability depends on
the