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Asset management ratios Market value ratios Debt management ratios Liquidity ratios

Asset management ratios Market value ratios Debt management ratios Liquidity ratios

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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1. Ratio Analysis (Formula Approach) Step 1: Quick Take: Ratio Analysis Ratio analysis is an important way of evaluating financial statements. Using ratios, instead of simply raw financial data, can help to make better comparisons of the strength of companies. There are many different kinds of ratios, which can be grouped into five general categories: 1. Liquidity ratios: These ratios are used to analyze whether or not a firm is able to pay its short-term debts (typically maturing within the next year). Good liquidity ratios are needed to continue operations of the firm. 2. Asset management ratios: These ratios are used to analyze the efficiency of asset use by a firm. Reasonable asset management ratios are required to sustain acceptable levels of net income. 3. Debt management ratios: These ratios analyze how a firm has financed its assets, as well as whether or not the firm can repay its long-term debt. 4. Profitability ratios: These ratios analyze how profitable a firm is. These ratios take both asset and debt management ratios into account to analyze overall return on equity. 5. Market value ratios: These ratios analyze investor confidence in the firm, both now and into the future. Suppose one firm has acquired far too much inventory and capital equipment, leading to large excess capacity. Which of the following categories of ratios would likely be most appropriate for comparing these companies in this scenario? Asset management ratios Market value ratios Debt management ratios Liquidity ratios
Transcribed Image Text:1. Ratio Analysis (Formula Approach) Step 1: Quick Take: Ratio Analysis Ratio analysis is an important way of evaluating financial statements. Using ratios, instead of simply raw financial data, can help to make better comparisons of the strength of companies. There are many different kinds of ratios, which can be grouped into five general categories: 1. Liquidity ratios: These ratios are used to analyze whether or not a firm is able to pay its short-term debts (typically maturing within the next year). Good liquidity ratios are needed to continue operations of the firm. 2. Asset management ratios: These ratios are used to analyze the efficiency of asset use by a firm. Reasonable asset management ratios are required to sustain acceptable levels of net income. 3. Debt management ratios: These ratios analyze how a firm has financed its assets, as well as whether or not the firm can repay its long-term debt. 4. Profitability ratios: These ratios analyze how profitable a firm is. These ratios take both asset and debt management ratios into account to analyze overall return on equity. 5. Market value ratios: These ratios analyze investor confidence in the firm, both now and into the future. Suppose one firm has acquired far too much inventory and capital equipment, leading to large excess capacity. Which of the following categories of ratios would likely be most appropriate for comparing these companies in this scenario? Asset management ratios Market value ratios Debt management ratios Liquidity ratios
Suppose that you are given the following data for Niles Company : Note: The data and calculations are based on a 365-day year. Cash and equivalents Fixed assets Sales Net income Current liabilities Current ratio DSO ROE $225,000 $650,000 $2,500,000 $112,500 $240,000 2.5 18.25 12.00%
Transcribed Image Text:Suppose that you are given the following data for Niles Company : Note: The data and calculations are based on a 365-day year. Cash and equivalents Fixed assets Sales Net income Current liabilities Current ratio DSO ROE $225,000 $650,000 $2,500,000 $112,500 $240,000 2.5 18.25 12.00%
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