Chapter 3 EVAL - EVALUATING A FIRM\'S FINANCIAL PERFORMANCE PDF

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EVALUATING A FIRM'S FINANCIAL PERFORMANCE...

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CHAPTER 3: EVALUATING A FIRM'S FINANCIAL PERFORMANCE 1. Financial Ratio Analysis 

It is used to determine certain ratios important in business decision-making, like determining profitability ratios, liquidity ratios, solvency ratios, leverage ratios, and activity ratios.  Profitability ratio - determines how profitable a firm is  return on investment = net profit ÷ owner's investment  return on sales = net profit ÷ net sales  Liquidity ratio - determines the firm's ability to meet short term obligations  current ratio = current assets ÷ current liabilities  Solvency ratio - determines the firm's ability to meet long-term obligations  debt ratio = total liabilities ÷ total assets  Leverage ratio - determines if the firm is technically insolvent  debt-to-assets ratio = total debt ÷ total assets  Activity ratio - determines if the firm is carrying more inventory than what it needs  inventory turnover = cost of goods sold ÷ average inventory

2. The DuPont Analysis: An Integrative Approach to Ratio Analysis   

It is a fundamental performance measurement framework popularized by the DuPont Corporation and is also referred to as the "DuPont identity." It breaks ROE into its constituent components to determine which of these components is most responsible for changes in ROE. ROE = Profit Margin x Total Asset Turnover x Leverage Factor ROE = (Net Income/Revenues) x (Revenues/Total Assets) x (Total Assets/ Shareholders' Equity)...