Finance Ch 4

What does liquidity measure the firms ability to pay its bills on time;indicates ease with which non cash assets can be converted into cash to meet financial obligations
Which ratios used to measure liquidity compare CA to CL Quick and Current
What does the quick ratio compare? Cash and current assets (minus inventory) that can be converted into cash during the year with the current liabilities
Which ratio is a more stringent test of a firm’s liquidity (often reports less liquid value) Quick
Avg Coll period tells us how long a firm takes to collect its receivables
What does the ORA indicate level of operating profits relative to firm’s total assets
What ratios help answer the question “Are mgrs generating adequate operating profits on the firms assets?’ Operating Return on Assets, Operating Profit Margin, Total Asset Turnover, Fixed Asset Turnover
“Are mgrs generating adequate operating profits on the firms assets?” focuses on what profitability of assets in which the firm has invested
What does OPM Measure how effective the company is in managing the COGS and Operating expenses that determine the operating profit
What does total asset turnover measure how efficiently a firm is in using its assets to generate sales
What two ratios tell us how a firm is financing its assets Debt and times interest earned
What does times interest earned ratio indicate amount of operating income available to service interest payments
What formula tells us if mgrs are providing a good return on the capital provided by shareholders? ROE
What do mkt value ratios indicate what investors think of mgmts past performance and future prospects
What does price earnings ratio indicate how much investors are willing to pay for $1 of reported earnings
What does price book ratio compare mkt value of share of stock to bv per share of the reported equity on balance sheet
Six Limitations of Financial Statement Analysis1) difficult to identify __________ or ________ peers2)Averages are only __________3) ______ ratio may not provide desirable ________4)___________ differ widely among firms5)________ratio does not lead to a ______conclusion6)________ may bias number in fin statements 1) difficult to identify industry categories or comparable peers2)Averages are only approximations3) Industry ratio may not provide desirable target ratio4)Accounting practices differ widely among firms5)High Low ratio does not lead to a specific conclusion6)Seasons may bias number in fin statements

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