We will want to answer questions about the firm’s n Liquidity n Efficient use of Assets n Leverage (financing) n Profitability
Financial Ratios n Tools that help us determine the financial health of a company. n We can compare a company’s financial ratios with its ratios in previous years (trend analysis). n We can compare a company’s financial ratios with those of its industry.
1. Liquidity Ratios n Do we have enough liquid assets to meet approaching obligations?
2. Operating Efficiency Ratios n Measure how efficiently the firm’s assets generate operating profits.
3. Leverage Ratios (financing decisions) n Measure the impact of using debt capital to finance assets. n Firms use debt to lever (increase) returns on common equity.
4. Return on Equity How well are the firm’s managers maximizing shareholder wealth?