Describe the “five-question approach” to using financial ratios.

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Answer 1

Textbook Question

Chapter 4, Problem 1RQ

Describe the “five-question approach” to using financial ratios.

Expert Solution & Answer

Summary Introduction

To discuss: “Five question approach” using financial ratios.

Explanation of Solution

How liquid is the firm? : This is to determine whether the company is able to repay creditors in a timely manner and compare current assets with current liabilities as well as the nature of the current assets.
How is the firm financing its assets? : To answer this question, the debt ratio is determined and the time interest earned is also measured.
Are managers providing good returns on capital to shareholders? : To determine this, return on equity analysis is calculated and compared to competitors.
Are managers generating adequate operating profits from its assets? : The company’s profitability, operating income and turnover ratios of the company are measured to determine the location of the assets.
Are managers creating shareholder’s value: The value is generated by the managers is determined by the added economic value or the market value ratios (price/earnings and price/book ratios) are analysed.

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Identify five limitations of ratios as a tool of financial analysis.

Answer 2

Textbook Question

Chapter 4, Problem 1RQ

Describe the “five-question approach” to using financial ratios.

Expert Solution & Answer

Summary Introduction

To discuss: “Five question approach” using financial ratios.

Explanation of Solution

How liquid is the firm? : This is to determine whether the company is able to repay creditors in a timely manner and compare current assets with current liabilities as well as the nature of the current assets.
How is the firm financing its assets? : To answer this question, the debt ratio is determined and the time interest earned is also measured.
Are managers providing good returns on capital to shareholders? : To determine this, return on equity analysis is calculated and compared to competitors.
Are managers generating adequate operating profits from its assets? : The company’s profitability, operating income and turnover ratios of the company are measured to determine the location of the assets.
Are managers creating shareholder’s value: The value is generated by the managers is determined by the added economic value or the market value ratios (price/earnings and price/book ratios) are analysed.

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Answer 3

Textbook Question

Chapter 4, Problem 1RQ

Describe the “five-question approach” to using financial ratios.

Expert Solution & Answer

Summary Introduction

To discuss: “Five question approach” using financial ratios.

Explanation of Solution

How liquid is the firm? : This is to determine whether the company is able to repay creditors in a timely manner and compare current assets with current liabilities as well as the nature of the current assets.
How is the firm financing its assets? : To answer this question, the debt ratio is determined and the time interest earned is also measured.
Are managers providing good returns on capital to shareholders? : To determine this, return on equity analysis is calculated and compared to competitors.
Are managers generating adequate operating profits from its assets? : The company’s profitability, operating income and turnover ratios of the company are measured to determine the location of the assets.
Are managers creating shareholder’s value: The value is generated by the managers is determined by the added economic value or the market value ratios (price/earnings and price/book ratios) are analysed.

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Answer 4

Textbook Question

Chapter 4, Problem 1RQ

Describe the “five-question approach” to using financial ratios.

Expert Solution & Answer

Summary Introduction

To discuss: “Five question approach” using financial ratios.

Explanation of Solution

How liquid is the firm? : This is to determine whether the company is able to repay creditors in a timely manner and compare current assets with current liabilities as well as the nature of the current assets.
How is the firm financing its assets? : To answer this question, the debt ratio is determined and the time interest earned is also measured.
Are managers providing good returns on capital to shareholders? : To determine this, return on equity analysis is calculated and compared to competitors.
Are managers generating adequate operating profits from its assets? : The company’s profitability, operating income and turnover ratios of the company are measured to determine the location of the assets.
Are managers creating shareholder’s value: The value is generated by the managers is determined by the added economic value or the market value ratios (price/earnings and price/book ratios) are analysed.

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

Expert Solution & Answer

Summary Introduction

To discuss: “Five question approach” using financial ratios.

Explanation of Solution

How liquid is the firm? : This is to determine whether the company is able to repay creditors in a timely manner and compare current assets with current liabilities as well as the nature of the current assets.
How is the firm financing its assets? : To answer this question, the debt ratio is determined and the time interest earned is also measured.
Are managers providing good returns on capital to shareholders? : To determine this, return on equity analysis is calculated and compared to competitors.
Are managers generating adequate operating profits from its assets? : The company’s profitability, operating income and turnover ratios of the company are measured to determine the location of the assets.
Are managers creating shareholder’s value: The value is generated by the managers is determined by the added economic value or the market value ratios (price/earnings and price/book ratios) are analysed.

Answer 8

Expert Solution & Answer

Summary Introduction

To discuss: “Five question approach” using financial ratios.

Explanation of Solution

How liquid is the firm? : This is to determine whether the company is able to repay creditors in a timely manner and compare current assets with current liabilities as well as the nature of the current assets.
How is the firm financing its assets? : To answer this question, the debt ratio is determined and the time interest earned is also measured.
Are managers providing good returns on capital to shareholders? : To determine this, return on equity analysis is calculated and compared to competitors.
Are managers generating adequate operating profits from its assets? : The company’s profitability, operating income and turnover ratios of the company are measured to determine the location of the assets.
Are managers creating shareholder’s value: The value is generated by the managers is determined by the added economic value or the market value ratios (price/earnings and price/book ratios) are analysed.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Summary Introduction

To discuss: “Five question approach” using financial ratios.

Answer 12

Explanation of Solution

How liquid is the firm? : This is to determine whether the company is able to repay creditors in a timely manner and compare current assets with current liabilities as well as the nature of the current assets.
How is the firm financing its assets? : To answer this question, the debt ratio is determined and the time interest earned is also measured.
Are managers providing good returns on capital to shareholders? : To determine this, return on equity analysis is calculated and compared to competitors.
Are managers generating adequate operating profits from its assets? : The company’s profitability, operating income and turnover ratios of the company are measured to determine the location of the assets.
Are managers creating shareholder’s value: The value is generated by the managers is determined by the added economic value or the market value ratios (price/earnings and price/book ratios) are analysed.

Answer 13

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Describe the “five-question approach” to using financial ratios.

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