Ch. 4 –Analysis of Financial Statements
<ul><li>SALES </li></ul><ul><li>-  EXPENSES </li></ul><ul><li>=  PROFIT </li></ul>Income Statement
<ul><li>SALES </li></ul><ul><li>-  EXPENSES </li></ul><ul><li>=  PROFIT </li></ul>Income Statement Revenue
Income Statement <ul><li>SALES </li></ul><ul><li>-  EXPENSES </li></ul><ul><li>=  PROFIT </li></ul>
Income Statement <ul><li>SALES </li></ul><ul><li>-  EXPENSES </li></ul><ul><li>=  PROFIT </li></ul><ul><li>Cost of Goods S...
Income Statement <ul><li>SALES </li></ul><ul><li>-  EXPENSES </li></ul><ul><li>=  PROFIT </li></ul><ul><li>Cost of Goods S...
Income Statement <ul><li>SALES </li></ul><ul><li>-  EXPENSES </li></ul><ul><li>=  PROFIT </li></ul><ul><li>Cost of Goods S...
Income Statement <ul><li>SALES </li></ul><ul><li>-  EXPENSES </li></ul><ul><li>=  PROFIT </li></ul><ul><li>Cost of Goods S...
Income Statement <ul><li>SALES </li></ul><ul><li>-  EXPENSES </li></ul><ul><li>=  PROFIT </li></ul><ul><li>Cost of Goods S...
<ul><li>SALES </li></ul><ul><li>-  Cost of Goods Sold </li></ul><ul><li>GROSS PROFIT </li></ul><ul><li>-  Operating Expens...
<ul><li>SALES </li></ul><ul><li>-  Cost of Goods Sold </li></ul><ul><li>GROSS PROFIT </li></ul><ul><li>-  Operating Expens...
<ul><li>SALES </li></ul><ul><li>-  Cost of Goods Sold </li></ul><ul><li>GROSS PROFIT </li></ul><ul><li>-  Operating Expens...
Balance Sheet <ul><li>Total Assets  = </li></ul>Outstanding Debt + Shareholders’ Equity
Balance Sheet
Balance Sheet Assets
Balance Sheet Assets Liabilities (Debt) & Equity
Balance Sheet <ul><li>Current Assets </li></ul><ul><li>Cash </li></ul><ul><li>Marketable Securities </li></ul><ul><li>Acco...
Financial Statement Analysis <ul><li>Are our decisions maximizing shareholder wealth? </li></ul>
<ul><li>We will want to answer questions about the firm’s </li></ul><ul><li>Liquidity </li></ul><ul><li>Efficient use of A...
<ul><li>We will want to answer questions about the firm’s </li></ul><ul><li>Liquidity </li></ul><ul><li>Efficient use of A...
Financial Ratios <ul><li>Tools that help us determine the financial health of a company. </li></ul><ul><li>We can compare ...
Example: CyberDragon Corporation
CyberDragon’s Balance Sheet  ($000) <ul><li>Assets: Liabilities & Equity: </li></ul><ul><li>Cash $2,540 Accounts payable  ...
<ul><li>Sales (all credit) $112,760 </li></ul><ul><li>Cost of goods sold   (85,300) </li></ul><ul><li>Gross profit   31,50...
CyberDragon Other Information <ul><li>Dividends paid on common stock $2,800 </li></ul><ul><li>Earnings retained in the fir...
1.  Liquidity Ratios <ul><li>Do we have enough liquid assets to meet approaching obligations? </li></ul>
What is CyberDragon’s  Current Ratio ?
What is CyberDragon’s  Current Ratio ? 50,190 25,523 =  1.97
What is CyberDragon’s  Current Ratio ? If the average current ratio for the  industry is  2.4 ,  is this good or not? 50,1...
What is the firm’s  Acid Test Ratio ?
What is the firm’s  Acid Test Ratio ? 50,190 - 27,530 25,523 =  .89
What is the firm’s  Acid Test Ratio ? Suppose the industry average is  .92 . What does this tell us? 50,190 - 27,530 25,52...
What is the firm’s  Average Collection Period ?
What is the firm’s  Average Collection Period ? 18,320 112,760/365 =  59.3 days
What is the firm’s  Average Collection Period ? If the industry average is  47 days , what does this tell us? 18,320 112,7...
2.  Operating Efficiency Ratios <ul><li>Measure how efficiently the firm’s assets generate operating profits. </li></ul>
What is the firm’s  Operating Income Return on Investment  (OIROI)?
What is the firm’s  Operating Income Return on Investment  (OIROI)? 11,520 81,890 =  14.07%
What is the firm’s  Operating Income Return on Investment  (OIROI)? <ul><li>Slightly below the industry average of  15% . ...
What is the firm’s  Operating Income Return on Investment  (OIROI)? <ul><li>Slightly below the industry average of  15% . ...
What is their  Operating Profit Margin ?
What is their  Operating Profit Margin ? 11,520 112,760 =  10.22%
What is their  Operating Profit Margin ? <ul><li>This is below the industry average of  </li></ul><ul><li>12% . </li></ul>...
What is their  Total Asset Turnover ?
What is their  Total Asset Turnover ? 112,760 81,890 =  1.38 times
What is their  Total Asset Turnover ? The industry average is  1.82 times .  The firm needs to figure out how to squeeze m...
What is the firm’s  Accounts Receivable Turnover ?
What is the firm’s  Accounts Receivable Turnover ? 112,760 18,320 =  6.16 times
What is the firm’s  Accounts Receivable Turnover ? CyberDragon turns their A/R over  6.16   times per year.  The industry ...
What is the firm’s  Inventory Turnover ?
What is the firm’s  Inventory Turnover ? 85,300 27,530 =  3.10 times
What is the firm’s  Inventory Turnover ? CyberDragon turns their inventory over 3.1 times per year.  The industry average ...
Low inventory turnover: <ul><li>The firm may have too much inventory, which is expensive because: </li></ul><ul><li>Invent...
What is the firm’s  Fixed Asset Turnover ?
What is the firm’s  Fixed Asset Turnover ? 112,760 31,700 =  3.56 times
What is the firm’s  Fixed Asset Turnover ? If the industry average is  4.6  times, what does this tell us about CyberDrago...
3.  Leverage Ratios (financing decisions) <ul><li>Measure the  impact of using debt capital  to finance assets. </li></ul>...
How does Leverage work? <ul><li>Suppose we have an all equity-financed firm worth $100,000.  Its earnings this year total ...
How does Leverage work? <ul><li>Suppose we have an all equity-financed firm worth $100,000.  Its earnings this year total ...
How does Leverage work? <ul><li>Suppose the same $100,000 firm is financed with half equity, and half 8% debt (bonds).  Ea...
How does Leverage work? <ul><li>Suppose the same $100,000 firm is financed with half equity, and half 8% debt (bonds).  Ea...
How does Leverage work? <ul><li>Suppose the same $100,000 firm is financed with half equity, and half 8% debt (bonds).  Ea...
What is CyberDragon’s  Debt Ratio ?
What is CyberDragon’s  Debt Ratio ? 47,523 81,890 =  58%
What is CyberDragon’s  Debt Ratio ? If the industry average is  47% , what does this tell us? 47,523 81,890 =  58%
What is CyberDragon’s  Debt Ratio ? If the industry average is  47% , what does this tell us? Can leverage make the firm  ...
What is the firm’s  Times Interest Earned  Ratio?
What is the firm’s  Times Interest Earned  Ratio? 11,520 3,160 =  3.65 times
What is the firm’s  Times Interest Earned  Ratio? The industry average is  6.7  times.  This  is further evidence that the...
4.  Profitability <ul><li>How well are the firm’s managers maximizing shareholder wealth? </li></ul>
What is CyberDragon’s  Net Profit Margin ? 5,016 112760 =  4.45%
What is CyberDragon’s Return on Equity  (ROE)?
What is CyberDragon’s Return on Equity  (ROE)? 5,015 34,367 =  14.6%
What is CyberDragon’s Return on Equity  (ROE)? The industry average is  17.54% . 5,015 34,367 =  14.6%
What is CyberDragon’s Return on Equity  (ROE)? The industry average is  17.54% . Is this what we would expect, given the f...
Calculate the Price/Earnings, Price/Cash flow, and Market/Book ratios. <ul><li>P/E = Price / Earnings per share </li></ul>...
The Du Pont system <ul><li>=  4.45*1.38* 81890/34367 = 14.63% </li></ul><ul><li>Focuses on expense control (PM), asset uti...
Conclusion: <ul><li>Even though CyberDragon has higher leverage than the industry average, they are  much less efficient ,...
Potential problems and limitations of financial ratio analysis <ul><li>Comparison with industry averages is difficult for ...
More issues regarding ratios <ul><li>Different operating and accounting practices can distort comparisons. </li></ul><ul><...
Qualitative factors to be considered when evaluating a company’s future financial performance <ul><li>Are the firm’s reven...
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Chapter 4

  1. 1. Ch. 4 –Analysis of Financial Statements
  2. 2. <ul><li>SALES </li></ul><ul><li>- EXPENSES </li></ul><ul><li>= PROFIT </li></ul>Income Statement
  3. 3. <ul><li>SALES </li></ul><ul><li>- EXPENSES </li></ul><ul><li>= PROFIT </li></ul>Income Statement Revenue
  4. 4. Income Statement <ul><li>SALES </li></ul><ul><li>- EXPENSES </li></ul><ul><li>= PROFIT </li></ul>
  5. 5. Income Statement <ul><li>SALES </li></ul><ul><li>- EXPENSES </li></ul><ul><li>= PROFIT </li></ul><ul><li>Cost of Goods Sold </li></ul>
  6. 6. Income Statement <ul><li>SALES </li></ul><ul><li>- EXPENSES </li></ul><ul><li>= PROFIT </li></ul><ul><li>Cost of Goods Sold </li></ul><ul><li>Operating Expenses </li></ul>
  7. 7. Income Statement <ul><li>SALES </li></ul><ul><li>- EXPENSES </li></ul><ul><li>= PROFIT </li></ul><ul><li>Cost of Goods Sold </li></ul><ul><li>Operating Expenses </li></ul><ul><li>(marketing, administrative) </li></ul>
  8. 8. Income Statement <ul><li>SALES </li></ul><ul><li>- EXPENSES </li></ul><ul><li>= PROFIT </li></ul><ul><li>Cost of Goods Sold </li></ul><ul><li>Operating Expenses </li></ul><ul><li>(marketing, administrative) </li></ul><ul><li>Financing Costs </li></ul>
  9. 9. Income Statement <ul><li>SALES </li></ul><ul><li>- EXPENSES </li></ul><ul><li>= PROFIT </li></ul><ul><li>Cost of Goods Sold </li></ul><ul><li>Operating Expenses </li></ul><ul><li>(marketing, administrative) </li></ul><ul><li>Financing Costs </li></ul><ul><li>Taxes </li></ul>
  10. 10. <ul><li>SALES </li></ul><ul><li>- Cost of Goods Sold </li></ul><ul><li>GROSS PROFIT </li></ul><ul><li>- Operating Expenses </li></ul><ul><li>OPERATING INCOME (EBIT) </li></ul><ul><li>- Interest Expense </li></ul><ul><li>EARNINGS BEFORE TAXES (EBT) </li></ul><ul><li>- Income Taxes </li></ul><ul><li>NET INCOME </li></ul><ul><li>- Preferred Stock Dividends </li></ul><ul><li>- NET INCOME AVAILABLE </li></ul><ul><li>TO COMMON STOCKHOLDERS </li></ul>Income Statement
  11. 11. <ul><li>SALES </li></ul><ul><li>- Cost of Goods Sold </li></ul><ul><li>GROSS PROFIT </li></ul><ul><li>- Operating Expenses </li></ul><ul><li>OPERATING INCOME (EBIT) </li></ul><ul><li>- Interest Expense </li></ul><ul><li>EARNINGS BEFORE TAXES (EBT) </li></ul><ul><li>- Income Taxes </li></ul><ul><li>NET INCOME </li></ul><ul><li>- Preferred Stock Dividends </li></ul><ul><li>- NET INCOME AVAILABLE </li></ul><ul><li>TO COMMON STOCKHOLDERS </li></ul>Income Statement Operating Activities
  12. 12. <ul><li>SALES </li></ul><ul><li>- Cost of Goods Sold </li></ul><ul><li>GROSS PROFIT </li></ul><ul><li>- Operating Expenses </li></ul><ul><li>OPERATING INCOME (EBIT) </li></ul><ul><li>- Interest Expense </li></ul><ul><li>EARNINGS BEFORE TAXES (EBT) </li></ul><ul><li>- Income Taxes </li></ul><ul><li>NET INCOME </li></ul><ul><li>- Preferred Stock Dividends </li></ul><ul><li>- NET INCOME AVAILABLE </li></ul><ul><li>TO COMMON STOCKHOLDERS </li></ul>Income Statement Financing Activities
  13. 13. Balance Sheet <ul><li>Total Assets = </li></ul>Outstanding Debt + Shareholders’ Equity
  14. 14. Balance Sheet
  15. 15. Balance Sheet Assets
  16. 16. Balance Sheet Assets Liabilities (Debt) & Equity
  17. 17. Balance Sheet <ul><li>Current Assets </li></ul><ul><li>Cash </li></ul><ul><li>Marketable Securities </li></ul><ul><li>Accounts Receivable </li></ul><ul><li>Inventories </li></ul><ul><li>Prepaid Expenses </li></ul><ul><li>Fixed Assets </li></ul><ul><li>Machinery & Equipment </li></ul><ul><li>Buildings and Land </li></ul><ul><li>Other Assets </li></ul><ul><li>Investments & patents </li></ul>Assets Liabilities (Debt) & Equity Current Liabilities Accounts Payable Accrued Expenses Short-term notes Long-Term Liabilities Long-term notes Mortgages Equity Preferred Stock Common Stock (Par value) Paid in Capital Retained Earnings
  18. 18. Financial Statement Analysis <ul><li>Are our decisions maximizing shareholder wealth? </li></ul>
  19. 19. <ul><li>We will want to answer questions about the firm’s </li></ul><ul><li>Liquidity </li></ul><ul><li>Efficient use of Assets </li></ul><ul><li>Leverage (financing) </li></ul><ul><li>Profitability </li></ul>
  20. 20. <ul><li>We will want to answer questions about the firm’s </li></ul><ul><li>Liquidity </li></ul><ul><li>Efficient use of Assets </li></ul><ul><li>Leverage (financing) </li></ul><ul><li>Profitability </li></ul>
  21. 21. Financial Ratios <ul><li>Tools that help us determine the financial health of a company. </li></ul><ul><li>We can compare a company’s financial ratios with its ratios in previous years (trend analysis) . </li></ul><ul><li>We can compare a company’s financial ratios with those of its industry. </li></ul>
  22. 22. Example: CyberDragon Corporation
  23. 23. CyberDragon’s Balance Sheet ($000) <ul><li>Assets: Liabilities & Equity: </li></ul><ul><li>Cash $2,540 Accounts payable 9,721 </li></ul><ul><li>Marketable securities 1,800 Notes payable 8,500 </li></ul><ul><li>Accounts receivable 18,320 Accrued taxes payable 3,200 </li></ul><ul><li>Inventories 27,530 Other current liabilities 4,102 </li></ul><ul><li>Total current assets 50,190 Total current liabilities 25,523 </li></ul><ul><li>Plant and equipment 43,100 Long-term debt (bonds) 22,000 </li></ul><ul><li>less accum deprec. 11,400 Total liabilities 47,523 </li></ul><ul><li>Net plant & equip. 31,700 Common stock ($10 par) 13,000 </li></ul><ul><li>Total assets 81,890 Paid in capital 10,000 </li></ul><ul><li>Retained earnings 11,367 </li></ul><ul><li>Total stockholders' equity 34,367 </li></ul><ul><li>Total liabilities & equity 81,890 </li></ul>
  24. 24. <ul><li>Sales (all credit) $112,760 </li></ul><ul><li>Cost of goods sold (85,300) </li></ul><ul><li>Gross profit 31,500 </li></ul><ul><li>Operating expenses: </li></ul><ul><li> Selling (6,540) </li></ul><ul><li> General & administrative (9,400) </li></ul><ul><li> Total operating expenses (15,940) </li></ul><ul><li>Earnings before interest and taxes (EBIT) 11,520 </li></ul><ul><li>Interest charges: </li></ul><ul><li> Interest on bank notes: (850) </li></ul><ul><li> Interest on bonds: (2,310) </li></ul><ul><li> Total interest charges ( 3,160) </li></ul><ul><li>Earnings before taxes (EBT) 8,600 </li></ul><ul><li>Taxes (3,344) </li></ul><ul><li>Net Income 5,016 </li></ul>CyberDragon’s Income Statement
  25. 25. CyberDragon Other Information <ul><li>Dividends paid on common stock $2,800 </li></ul><ul><li>Earnings retained in the firm 2,216 </li></ul><ul><li>Shares outstanding (000) 1,300 </li></ul><ul><li>Market price per share 20 </li></ul><ul><li>Book value per share 26.44 </li></ul><ul><li>Earnings per share 3.86 </li></ul><ul><li>Dividends per share 2.15 </li></ul>
  26. 26. 1. Liquidity Ratios <ul><li>Do we have enough liquid assets to meet approaching obligations? </li></ul>
  27. 27. What is CyberDragon’s Current Ratio ?
  28. 28. What is CyberDragon’s Current Ratio ? 50,190 25,523 = 1.97
  29. 29. What is CyberDragon’s Current Ratio ? If the average current ratio for the industry is 2.4 , is this good or not? 50,190 25,523 = 1.97
  30. 30. What is the firm’s Acid Test Ratio ?
  31. 31. What is the firm’s Acid Test Ratio ? 50,190 - 27,530 25,523 = .89
  32. 32. What is the firm’s Acid Test Ratio ? Suppose the industry average is .92 . What does this tell us? 50,190 - 27,530 25,523 = .89
  33. 33. What is the firm’s Average Collection Period ?
  34. 34. What is the firm’s Average Collection Period ? 18,320 112,760/365 = 59.3 days
  35. 35. What is the firm’s Average Collection Period ? If the industry average is 47 days , what does this tell us? 18,320 112,760/365 = 59.3 days
  36. 36. 2. Operating Efficiency Ratios <ul><li>Measure how efficiently the firm’s assets generate operating profits. </li></ul>
  37. 37. What is the firm’s Operating Income Return on Investment (OIROI)?
  38. 38. What is the firm’s Operating Income Return on Investment (OIROI)? 11,520 81,890 = 14.07%
  39. 39. What is the firm’s Operating Income Return on Investment (OIROI)? <ul><li>Slightly below the industry average of 15% . </li></ul>11,520 81,890 = 14.07%
  40. 40. What is the firm’s Operating Income Return on Investment (OIROI)? <ul><li>Slightly below the industry average of 15% . </li></ul><ul><li>The OIROI reflects product pricing and the firm’s ability to keep costs down. </li></ul>11,520 81,890 = 14.07%
  41. 41. What is their Operating Profit Margin ?
  42. 42. What is their Operating Profit Margin ? 11,520 112,760 = 10.22%
  43. 43. What is their Operating Profit Margin ? <ul><li>This is below the industry average of </li></ul><ul><li>12% . </li></ul>11,520 112,760 = 10.22%
  44. 44. What is their Total Asset Turnover ?
  45. 45. What is their Total Asset Turnover ? 112,760 81,890 = 1.38 times
  46. 46. What is their Total Asset Turnover ? The industry average is 1.82 times . The firm needs to figure out how to squeeze more sales dollars out of its assets. 112,760 81,890 = 1.38 times
  47. 47. What is the firm’s Accounts Receivable Turnover ?
  48. 48. What is the firm’s Accounts Receivable Turnover ? 112,760 18,320 = 6.16 times
  49. 49. What is the firm’s Accounts Receivable Turnover ? CyberDragon turns their A/R over 6.16 times per year. The industry average is 8.2 times. Is this efficient? 112,760 18,320 = 6.16 times
  50. 50. What is the firm’s Inventory Turnover ?
  51. 51. What is the firm’s Inventory Turnover ? 85,300 27,530 = 3.10 times
  52. 52. What is the firm’s Inventory Turnover ? CyberDragon turns their inventory over 3.1 times per year. The industry average is 3.9 times. Is this efficient? 85,300 27,530 = 3.10 times
  53. 53. Low inventory turnover: <ul><li>The firm may have too much inventory, which is expensive because: </li></ul><ul><li>Inventory takes up costly warehouse space. </li></ul><ul><li>Some items may become spoiled or obsolete. </li></ul>
  54. 54. What is the firm’s Fixed Asset Turnover ?
  55. 55. What is the firm’s Fixed Asset Turnover ? 112,760 31,700 = 3.56 times
  56. 56. What is the firm’s Fixed Asset Turnover ? If the industry average is 4.6 times, what does this tell us about CyberDragon? 112,760 31,700 = 3.56 times
  57. 57. 3. Leverage Ratios (financing decisions) <ul><li>Measure the impact of using debt capital to finance assets. </li></ul><ul><li>Firms use debt to lever (increase) returns on common equity. </li></ul>
  58. 58. How does Leverage work? <ul><li>Suppose we have an all equity-financed firm worth $100,000. Its earnings this year total $15,000. </li></ul><ul><li>ROE = </li></ul><ul><li>(ignore taxes for this example) </li></ul>
  59. 59. How does Leverage work? <ul><li>Suppose we have an all equity-financed firm worth $100,000. Its earnings this year total $15,000. </li></ul><ul><li>ROE = = 15% </li></ul>15,000 100,000
  60. 60. How does Leverage work? <ul><li>Suppose the same $100,000 firm is financed with half equity, and half 8% debt (bonds). Earnings are still $15,000. </li></ul><ul><li>ROE = </li></ul>
  61. 61. How does Leverage work? <ul><li>Suppose the same $100,000 firm is financed with half equity, and half 8% debt (bonds). Earnings are still $15,000. </li></ul><ul><li>ROE = = </li></ul>15,000 - 4,000 50,000
  62. 62. How does Leverage work? <ul><li>Suppose the same $100,000 firm is financed with half equity, and half 8% debt (bonds). Earnings are still $15,000. </li></ul><ul><li>ROE = = 22% </li></ul>15,000 - 4,000 50,000
  63. 63. What is CyberDragon’s Debt Ratio ?
  64. 64. What is CyberDragon’s Debt Ratio ? 47,523 81,890 = 58%
  65. 65. What is CyberDragon’s Debt Ratio ? If the industry average is 47% , what does this tell us? 47,523 81,890 = 58%
  66. 66. What is CyberDragon’s Debt Ratio ? If the industry average is 47% , what does this tell us? Can leverage make the firm more profitable ? Can leverage make the firm riskier ? 47,523 81,890 = 58%
  67. 67. What is the firm’s Times Interest Earned Ratio?
  68. 68. What is the firm’s Times Interest Earned Ratio? 11,520 3,160 = 3.65 times
  69. 69. What is the firm’s Times Interest Earned Ratio? The industry average is 6.7 times. This is further evidence that the firm uses more debt financing than average. 11,520 3,160 = 3.65 times
  70. 70. 4. Profitability <ul><li>How well are the firm’s managers maximizing shareholder wealth? </li></ul>
  71. 71. What is CyberDragon’s Net Profit Margin ? 5,016 112760 = 4.45%
  72. 72. What is CyberDragon’s Return on Equity (ROE)?
  73. 73. What is CyberDragon’s Return on Equity (ROE)? 5,015 34,367 = 14.6%
  74. 74. What is CyberDragon’s Return on Equity (ROE)? The industry average is 17.54% . 5,015 34,367 = 14.6%
  75. 75. What is CyberDragon’s Return on Equity (ROE)? The industry average is 17.54% . Is this what we would expect, given the firm’s leverage? 5,015 34,367 = 14.6%
  76. 76. Calculate the Price/Earnings, Price/Cash flow, and Market/Book ratios. <ul><li>P/E = Price / Earnings per share </li></ul><ul><li>= 20/3.86 = 5.18 </li></ul><ul><ul><li>P/E: How much investors are willing to pay for $1 of earnings. </li></ul></ul><ul><li>M/B = Market price / Book value per share </li></ul><ul><li>= 20/26.44 = 0.76 </li></ul><ul><ul><li>M/B: How much investors are willing to pay for $1 of book value equity. </li></ul></ul>
  77. 77. The Du Pont system <ul><li>= 4.45*1.38* 81890/34367 = 14.63% </li></ul><ul><li>Focuses on expense control (PM), asset utilization (TA TO), and debt utilization (Equity multiplier.) </li></ul>
  78. 78. Conclusion: <ul><li>Even though CyberDragon has higher leverage than the industry average, they are much less efficient , and therefore, less profitable. </li></ul>
  79. 79. Potential problems and limitations of financial ratio analysis <ul><li>Comparison with industry averages is difficult for a conglomerate firm that operates in many different divisions. </li></ul><ul><li>“Average” performance is not necessarily good, perhaps the firm should aim higher. </li></ul><ul><li>Seasonal factors can distort ratios. </li></ul><ul><li>“Window dressing” techniques can make statements and ratios look better. </li></ul>
  80. 80. More issues regarding ratios <ul><li>Different operating and accounting practices can distort comparisons. </li></ul><ul><li>Sometimes it is hard to tell if a ratio is “good” or “bad”. </li></ul><ul><li>Difficult to tell whether a company is, on balance, in strong or weak position. </li></ul>
  81. 81. Qualitative factors to be considered when evaluating a company’s future financial performance <ul><li>Are the firm’s revenues tied to one key customer, product, or supplier? </li></ul><ul><li>What percentage of the firm’s business is generated overseas? </li></ul><ul><li>Competition </li></ul><ul><li>Future prospects </li></ul><ul><li>Legal and regulatory environment </li></ul>

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