3-6 Why are ratios useful? Standardize numbers facilitate comparisons Used to highlight weaknesses and strengths Copy right C 2002 Harcourt, Inc All rights reserved
3 - 6 Copyright © 2002 Harcourt, Inc. All rights reserved. ◼Standardize numbers; facilitate comparisons ◼Used to highlight weaknesses and strengths Why are ratios useful?
3-7 What are the five major categories of ratios, and what questions do they answer? Liquidity: Can we make required payments as they fall due? Asset management: Do we have the right amount of assets for the level of sales? More.) Copy right C 2002 Harcourt, Inc All rights reserved
3 - 7 Copyright © 2002 Harcourt, Inc. All rights reserved. ◼Liquidity: Can we make required payments as they fall due? ◼Asset management: Do we have the right amount of assets for the level of sales? What are the five major categories of ratios, and what questions do they answer? (More…)
3-8 Debt management: Do we have the right mix of debt and equity? Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA? they see as reflected in PlE and Me w Market value: Do investors like wha ratios? Copy right C 2002 Harcourt, Inc All rights reserved
3 - 8 Copyright © 2002 Harcourt, Inc. All rights reserved. ◼Debt management: Do we have the right mix of debt and equity? ◼Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA? ◼Market value: Do investors like what they see as reflected in P/E and M/B ratios?
3-9 Calculate the firm's forecasted current and quick ratios for 2002 cR._cA=51445=185x 2,680 QR CA-Iny 02 CL $2,680-$1716 $1445 =0.67X Copy right C 2002 Harcourt, Inc All rights reserved
3 - 9 Copyright © 2002 Harcourt, Inc. All rights reserved. Calculate the firm’s forecasted current and quick ratios for 2002. CR02 = = = 1.85x. QR02 = = = 0.67x. CA CL $2,680 $1,445 $2,680 - $1,716 $1,445 CA - Inv. CL
3-10 Comments on CR and QR 2002E20012000nd cR185x1.1x23x2.7x QR0.67x0.4X0.8x1.0x Expected to improve but still below the industry average Liquidity position is weak Copy right C 2002 Harcourt, Inc All rights reserved
3 - 10 Copyright © 2002 Harcourt, Inc. All rights reserved. ◼Expected to improve but still below the industry average. ◼Liquidity position is weak. Comments on CR and QR 2002E 2001 2000 Ind. CR 1.85x 1.1x 2.3x 2.7x QR 0.67x 0.4x 0.8x 1.0x