1. Chapter 4

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

3. 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.

4. 1. Liquidity Ratios n Do we have enough liquid assets to meet approaching obligations?

5. 2. Operating Efficiency Ratios n Measure how efficiently the firm’s assets generate operating profits.

6. 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.

7. 4. Return on Equity How well are the firm’s managers maximizing shareholder wealth?