1. Ratio Analysis (Formula Approach)Step 1: Quick Take: Ratio AnalysisRatio analysis is an important way of evaluating financial statements. Using ratios, instead of simply raw financial data, can help to make bettercomparisons of the strength of companies.There are many different kinds of ratios, which can be grouped into five general categories:1. Liquidity ratios: These ratios are used to analyze whether or not a firm is able to pay its short-term debts (typically maturing withinthe next year). Good liquidity ratios are needed to continue operations of the firm.2. Asset management ratios: These ratios are used to analyze the efficiency of asset use by a firm. Reasonable asset managementratios are required to sustain acceptable levels of net income.3. Debt management ratios: These ratios analyze how a firm has financed its assets, as well as whether or not the firm can repay itslong-term debt.4. Profitability ratios: These ratios analyze how profitable a firm is. These ratios take both asset and debt management ratios intoaccount to analyze overall return on equity.5. Market value ratios: These ratios analyze investor confidence in the firm, both now and into the future.Suppose one firm has acquired far too much inventory and capital equipment, leading to large excess capacity.Which of the following categories of ratios would likely be most appropriate for comparing these companies in this scenario?Asset management ratiosMarket value ratiosDebt management ratiosLiquidity ratios Suppose that you are given the following data for Niles Company :Note: The data and calculations are based on a 365-day year.Cash and equivalentsFixed assetsSalesNet incomeCurrent liabilitiesCurrent ratioDSOROE$225,000$650,000$2,500,000$112,500$240,0002.518.2512.00%

Lets understand the basics. Management calculate various ratios to calculate the result of the…

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Asset management ratios Market value ratios Debt management ratios Liquidity ratios

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 10P

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Question

1. Ratio Analysis (Formula Approach)
Step 1: Quick Take: Ratio Analysis
Ratio analysis is an important way of evaluating financial statements. Using ratios, instead of simply raw financial data, can help to make better
comparisons of the strength of companies.
There are many different kinds of ratios, which can be grouped into five general categories:
1. Liquidity ratios: These ratios are used to analyze whether or not a firm is able to pay its short-term debts (typically maturing within
the next year). Good liquidity ratios are needed to continue operations of the firm.
2. Asset management ratios: These ratios are used to analyze the efficiency of asset use by a firm. Reasonable asset management
ratios are required to sustain acceptable levels of net income.
3. Debt management ratios: These ratios analyze how a firm has financed its assets, as well as whether or not the firm can repay its
long-term debt.
4. Profitability ratios: These ratios analyze how profitable a firm is. These ratios take both asset and debt management ratios into
account to analyze overall return on equity.
5. Market value ratios: These ratios analyze investor confidence in the firm, both now and into the future.
Suppose one firm has acquired far too much inventory and capital equipment, leading to large excess capacity.
Which of the following categories of ratios would likely be most appropriate for comparing these companies in this scenario?
Asset management ratios
Market value ratios
Debt management ratios
Liquidity ratios

Suppose that you are given the following data for Niles Company :
Note: The data and calculations are based on a 365-day year.
Cash and equivalents
Fixed assets
Sales
Net income
Current liabilities
Current ratio
DSO
ROE
$225,000
$650,000
$2,500,000
$112,500
$240,000
2.5
18.25
12.00%

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