Tools that help us determine the financial health of a company. We can compare a company’s financial ratios with its ratios in previous years (trend analysis). We can compare a company’s financial ratios with those of its industry. Do we have enough liquid assets to meet approaching obligations ?If the average current ratio for the industry is , is this good or not? | Ch. 3 - Evaluating a Firm’s Financial Performance 2002, Prentice Hall, Inc. Financial Statement Analysis Are our decisions maximizing shareholder wealth? We will want to answer questions about the firm’s Liquidity Efficient use of Assets Leverage (financing) Profitability We will want to answer questions about the firm’s Liquidity Efficient use of Assets Leverage (financing) Profitability Financial Ratios Tools that help us determine the financial health of a company. We can compare a company’s financial ratios with its ratios in previous years (trend analysis). We can compare a company’s financial ratios with those of its industry. Example: CyberDragon Corporation CyberDragon’s Balance Sheet ($000) Assets: Liabilities & Equity: Cash $2,540 Accounts payable 9,721 Marketable securities 1,800 Notes payable 8,500 Accounts receivable 18,320 Accrued taxes payable 3,200 Inventories 27,530 Other current liabilities 4,102 Total current assets 50,190 Total current liabilities 25,523 Plant and equipment 43,100 Long-term debt (bonds) 22,000 less accum deprec. 11,400 Total liabilities 47,523 Net plant & equip. 31,700 Common stock ($10 par) 13,000 Total assets 81,890 Paid in capital 10,000 Retained earnings 11,367 Total stockholders' equity 34,367 Total liabilities & equity 81,890 Sales (all credit) $112,760 Cost of Goods Sold (85,300) Gross Profit 27,460 Operating Expenses: Selling (6,540) General & Administrative (9,400) Total Operating Expenses (15,940) Earnings before interest and taxes (EBIT) 11,520 Interest charges: Interest on bank notes: (850) Interest on bonds: (2,310) Total Interest charges (3,160) Earnings before taxes (EBT) 8,360 Taxes (assume 40%) (3,344) Net Income 5,016 CyberDragon’s Income Statement CyberDragon Other Information Dividends paid on common stock $2,800 Earnings retained in the firm 2,216 Shares outstanding (000) 1,300 Market price per share 20 Book value per share Earnings per share Dividends per share 1. Liquidity Ratios Do we . | Ch. 3 - Evaluating a Firm’s Financial Performance 2002, Prentice Hall, Inc. Financial Statement Analysis Are our decisions maximizing shareholder wealth? We will want to answer questions about the firm’s Liquidity Efficient use of Assets Leverage (financing) Profitability We will want to answer questions about the firm’s Liquidity Efficient use of Assets Leverage (financing) Profitability Financial Ratios Tools that help us determine the financial health of a company. We can compare a company’s financial ratios with its ratios in previous years (trend analysis). We can compare a company’s financial ratios with those of its industry. Example: CyberDragon Corporation CyberDragon’s Balance Sheet ($000) Assets: Liabilities & Equity: Cash $2,540 Accounts payable 9,721 Marketable securities 1,800 Notes payable 8,500 Accounts receivable 18,320 Accrued taxes payable 3,200 Inventories 27,530 Other current liabilities 4,102 Total current assets 50,190 Total current liabilities 25,523 Plant .
