Financial Ratios

INTRODUCTION

The purpose of this presentation is to discuss some of the essential concepts of financial statement and cash flow analysis. As a first step, financial ratios will be examined. Financial ratios are a significant tool to analyze and compare the relationship between different pieces of financial information and understand the operations of the firm. Following this discussion, we will examine the construction of cash flow statements and consider how changes in various accounts impact the cash flow balance. Accordingly, the presentation will be divided into two parts: a review of ratio analysis and the construction and analysis of cash flow statements.

RATIO OVERVIEW

Different individuals have varied uses of financial ratios. Additionally, financial research firms often do not compute ratios in exactly the same way, which can add to a user's confusion. Generally, ratios are grouped into four categories and examined in terms of

a) the ratio's trend, and

b) its value relative to some norm such as an industry average.

Analysts and users most commonly group ratios into four catergories:

1) Operating or profit margin ratios,

2) Liquidity ratios,

3) Managerial or turnover ratios, and

4) Leverage and coverage ratios.

An outline of some of the more common ratios which fall into each category is presented on the following two pages. A profitability analysis category is also provided at the end of this outline so that we can better understand how profitability, turnover and leverage interact to determine a firm's return on equity. For each of these ratios, several questions may come to mind. Specifically,

1) How is each computed?

2) What is it intended to measure and of what interest is it?

3) What might a high or low value be telling us?

4) How might ratios be misleading and what relationship might a

particular change in a ratio have to the cash balance?

The...