Chapter 4. We will want to answer questions about the firm’s n Liquidity n Efficient use of Assets n Leverage (financing) n Profitability.

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Presentation transcript:

Chapter 4

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?

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