2.5 Financial Analysis - Ratios

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2.5 Financial Analysis - Ratios


Pages:
19
School:
University of Texas at Austin
Course:
Fin 320f - Foundations of Finance
Foundations of Finance Documents

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Do not worry about your difficulties in Mathematics. I can assure you mine are still greater. Albert Einstein German-American physicist (1879 – 1955) Foundations of Finance 2.5 Financial Analysis Ratio Analysis 2011 - 2023© H Toprac 3 The Balance Sheet Cash $42,000 Accounts Receivable 78,000 Inventory 120,000 Total Current Assets $240,000 Net Fixed Assets 210,000 Total Assets $450,000 Accounts Payable $54,000 Long-term Debt 16,000 Common Stock1 (1000 shares @ $50) 50,000 Retained Earnings 330,000 Total Liabilities & Equity $450,000 1Market price = $120 er sharei 2011 - 2023© H Toprac 4 The Income Statement 2Includes credit sales of $750,000l i l Sales2 $1,000,000 Less: COGS 600,000 Gross Profit $400,000 Less: OpEx 250,000 Operating Income $150,000 Less: Interest Expense 50,000 Earnings B4 Taxes $100,000 Less: Tax Expense 40,000 Net Income $60,000  Trend analysis: Comparing a firm’s ratios over time  Benchmarking: Comparing the firm’s ratios to those of other firms 2011 - 2023© H Toprac 5 Ratios provide two ways to analyze financial performance 1. How liquid is the firm? 2. Is management generating adequate operating profits on the firm’s assets? 3. How is the firm financing its assets? 4. Is management generating an adequate return on the capital provided by owners? 5. Is management creating shareholder value? 2011 - 2023© H Toprac 6 Ratio analysis helps answer five basic questions



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