Financial Ratio Analysis

3816 words 16 pages

Financial Ratio Analysis
William F. Slater, III
ACC 529 – Accounting for Managerial Decision Making
University of Phoenix
Week 5 Assignment for ePortfolio
Michael Greenen, C.P.A, C.F.P. - Instructor
July 1, 2003

Table of Contents
Table of Contents 3
Abstract 4
Introduction 4
Memorandum 4
Profitability of Sample Company 5
Sample Company ROI for 2000 5
Sample Company ROI for 2001 5
Stock Performance 6
Activity of Sample Company 7
Leverage of Sample Company 7
Liquidity of Sample Company 7
What Is Necessary to Assess the Company? 8
What Ratios Have the Most Value? 10
What Other Factors, Beyond Ratios, Need To Be Considered? 10
How Would
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The reason being that if a company is struggling to pay out large earnings per share, to make the denominator in the P/E equation large enough to keep the P/E ratio low, then often such financial pressures can take the attention of the management away from the company's operations and other important issues, like surviving as a going concern in a tough business climate.

Activity of Sample Company The activity ratios measure the company's management of asset levels and sales (Marshall, 2002). Between 2000 and 2001, Sample Company showed positive performance with its average days sales by over 25% and decreased its number of day sales in accounts receivable over 2%. Together, these ratios show the efficiency of collection relative to the average age of receivables. The inventory turnover fell by 5.9% and the fixed asset turnover increased by 18.8%. These turnover figures overall would suggest that assets are being used efficiently to produce sales. Leverage of Sample Company Leverage is the use of debt to finance company assets (Marshall, 2002). When a company uses leverage, it incurs an additional component in its operations, put it also increases the ROE relative to the ROI. Between 2000 and 2001, Sample Company's debt ratio increased 32.3% and its debt / equity ratio increased 21.5%. An assumption of greater debt in order to produce the overall increase in performance


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