What is the most important goal of a financial manager?
To maximize the per share value of the company’s stock
The current market value depends on the company’s expected future earnings and cash flows.
Why are financial statements important?
- Inform managers, creditors, and investors about the company’s well-being
- Provide information on covering liabilities with assets
- Indicate profitability and sustainability of profits
- Inform about potential bankruptcy risks
Financial statements are essential for assessing a company’s financial health.
What is the objective of Financial Ratio Analysis for managers?
- Compare current financial situation to the past
- Measure success in operations
- Assess achievement of internal objectives
Financial ratio analysis helps managers evaluate performance over time.
What is a common-size statement?
- A standardized financial statement presenting all items in percentage terms
In a common-size balance sheet, items are shown as a percentage of total assets.
What does a common-base year statement do?
- Presents all items relative to a certain base year amount
One year is taken as a base year, and values for that year are set to 100.
What are the five groups of financial ratios?
- Liquidity Ratios
- Asset Management Ratios
- Debt Management Ratios
- Profitability Ratios
- Market Value Ratios
These groups help analyze different aspects of a company’s financial health.
What does the Current Ratio indicate?
The firm’s ability to cover its short-term liabilities with current assets
A current ratio of at least 1.0 is generally expected.
What is the Quick Ratio also known as?
Acid-Test Ratio
It measures the ability to cover short-term liabilities without relying on inventories.
What does the Inventory Turnover Ratio show?
How many times inventories are renewed during a period
A higher ratio indicates better inventory management.
What is the Average Collection Period (ACP)?
Days’ Sales in Receivables
It shows how fast a firm collects on sales; a smaller ratio is better.
What does the Fixed Assets Turnover Ratio indicate?
How effectively a firm uses its net fixed assets to generate sales
A ratio of 2.0 is considered good for most companies.
What does the Total Assets Turnover Ratio measure?
How effectively a firm manages its total assets in generating sales
A low ratio indicates the company is not operating at its best capacity.
What does the Total Debt Ratio show?
What percent of total assets is financed by debt
A ratio above 0.6 is considered risky for most companies.
What does the Times Interest Earned Ratio indicate?
How comfortably a firm can make its interest payments
It uses EBIT instead of net income in the numerator.
What does the Profit Margin ratio show?
What percent of net sales becomes net profit
A low profit margin indicates high operational costs or large interest payments.
What is the Return on Assets (ROA) ratio?
A measure of profit per dollar of assets
It indicates how profitable the company is in all of its operations.
What was the profit margin on sales for Allied Food Products in 2015?
13.78%
The industry average for profit margin on sales is 15.0%.
What does the profit margin on sales ratio indicate?
How much a company’s total assets can generate net profit after paying interest and taxes.
What is the Return on Assets (ROA) for Allied Food Products in 2015?
12.77%
The industry average for ROA is 15.0%.
What does ROA measure?
Profit per dollar of assets.
What is the Return on Equity (ROE) for Allied Food Products in 2015?
26.96%
The industry average for ROE is 25.0%.
What does ROE measure?
How the stockholders fared during the year.
True or false: A higher ROE compared to ROA indicates higher borrowing.
TRUE
Allied Food has a relatively better ROE compared to ROA due to higher borrowing.
What do market value ratios compare?
Company’s stock price to earnings per share and to book value per share.
