i. Use the following simplified 2019 balance sheet to show, in general terms, how an improvement in one of the ratios—say, the DSO—would affect the stock price. For example, if the company could improve its collection procedures and thereby lower the DSO from 38.1 days to 27.8 days, how would that change “ripple through” the financial statements (shown in thousands below) and influence the stock price? Accounts receivable $ 402 Debt $ 965 Other current assets 888 Net fixed assets 361 Equity 686. Total assets $1,651 Total liabilities and equity $1,651 j. Although financial statement analysis can provide useful information about a company’s operations and its financial condition, this type of analysis does have some potential problems and limitations, and it must be used with care and judgment. What are some problems and limitations?
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
i. Use the following simplified 2019
of the ratios—say, the DSO—would affect the stock price. For example, if the company could improve its
collection procedures and thereby lower the DSO from 38.1 days to 27.8 days, how would that change
“ripple through” the financial statements (shown in thousands below) and influence the stock price?
Accounts receivable $ 402 Debt $ 965 Other current assets 888
Net fixed assets 361 Equity 686. Total assets $1,651 Total liabilities and equity $1,651
j. Although financial statement analysis can provide useful information about a company’s operations and
its financial condition, this type of analysis does have some potential problems and limitations, and it
must be used with care and judgment. What are some problems and limitations?
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