Finance Project
INTRODUCTION
Financial statement analysis helps managers predict future earnings, dividends and free cash flow. Analysts use financial ratios to derive important information about the relationships between individual values in the financial statements and identify problem areas and opportunities within a firm. On the other hand, investors use financial statements to derive safe conclusions about a firm 's relative performance over time, and make informed investment decisions.
Financial ratios are classified into five major categories that highlight a firm 's (1) liquidity, (2) efficiency, (3) financial leverage, (4) profitability and (5) value.
(1) Liquidity
Liquidity ratios provide an indication of a firm 's short term financial situation expressing the extent to which a firm is able to pay off its debt as it comes due over the next year. The major liquidity ratios are:
• Current ratio: it is the most commonly used measure of short term solvency, as it provides an indication of the extent to which the company can cover the short term claims of its creditors by assets that are expected to be liquidated quickly.
• Quick ratio: it measures the ability of a firm to use relatively liquid current assets such as cash and account receivable to cover its current liabilities.
• Cash ratio: it further refines current ratio and quick ratio by relating a firm 's cash and short-term marketable securities to its current liabilities.
• Receivable Turnover: it measures how often the firm 's receivables turn over, that is how often they are collected. If the average collection period implies a fast turnover, it means that the firm gets the funds to pay off its own liabilities on time.
• Inventory Turnover: it measures how many times a firm 's inventory is sold and replaced over a period. High inventory turnover typically represents a zero return on investment.
(2) Efficiency (Asset management)
Efficiency ratios provide an indication of a firm 's receivables and how
Financial statement analysis helps managers predict future earnings, dividends and free cash flow. Analysts use financial ratios to derive important information about the relationships between individual values in the financial statements and identify problem areas and opportunities within a firm. On the other hand, investors use financial statements to derive safe conclusions about a firm 's relative performance over time, and make informed investment decisions.
Financial ratios are classified into five major categories that highlight a firm 's (1) liquidity, (2) efficiency, (3) financial leverage, (4) profitability and (5) value.
(1) Liquidity
Liquidity ratios provide an indication of a firm 's short term financial situation expressing the extent to which a firm is able to pay off its debt as it comes due over the next year. The major liquidity ratios are:
• Current ratio: it is the most commonly used measure of short term solvency, as it provides an indication of the extent to which the company can cover the short term claims of its creditors by assets that are expected to be liquidated quickly.
• Quick ratio: it measures the ability of a firm to use relatively liquid current assets such as cash and account receivable to cover its current liabilities.
• Cash ratio: it further refines current ratio and quick ratio by relating a firm 's cash and short-term marketable securities to its current liabilities.
• Receivable Turnover: it measures how often the firm 's receivables turn over, that is how often they are collected. If the average collection period implies a fast turnover, it means that the firm gets the funds to pay off its own liabilities on time.
• Inventory Turnover: it measures how many times a firm 's inventory is sold and replaced over a period. High inventory turnover typically represents a zero return on investment.
(2) Efficiency (Asset management)
Efficiency ratios provide an indication of a firm 's receivables and how
References: InsideView. (2013). InsideView. Retrieved 09 09, 2013, from InsideView: http://www.insideview.com/directory/nike-inc Warren, C. (2012). In Managerial Accounting (pp. 586-587). Mason, OH: South Western Cengage Learning. APPENDIX