chapter 8 powerpoint
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Created by:
bestravila on February 14, 2012
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24 terms
Terms | Definitions |
|---|---|
 ratios | Standardize numbers; facilitate comparisons Used to highlight weaknesses and strengths |
| 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 |
| 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 |
| current ratio and quick ratio | lower than industry means its has a weak liquidity position |
| DSO | average number of days from sale until cash received. higher than industry means firm collects too slowly. |
| TA turnover not up to industry average | Caused by excessive current assets (A/R and inventory). |
| BEP | removes effect of taxes and financial leverage. Useful for comparison |
| ROA | is lowered by debt--interest expense lowers net income, which also lowers it |
| Increase in ROE | the use of debt lowers equity, and if equity is lowered more than net income |
| P/E | How much investors will pay for $1 of earnings. Higher is better |
| M/B | How much paid for $1 of book value. Higher is better |
| P/E and M/B | are high if ROE is high, risk is low. |
| Computron has higher proportion of inventory and current assets than Industry | Computron now has more equity (which means LESS debt) than Industry. Computron has more short-term debt than industry, but less long-term debt than industry. |
| Computron has lower COGS (86.7) than industry (84.5), but higher other expenses. | Result is that Computron has similar EBIT (7.1) as industry. |
| We see that 2010 sales grew 105% from 2008, and that NI grew 188% from 2008. | So Computron has become more profitable. |
| We see that total assets grew at a rate of 139%, while sales grew at a rate of only 105%. | So asset utilization remains a problem. |
| Du Pont system | focuses on: Expense control (PM) Asset utilization (TATO) Debt utilization (EM) It shows how these factors combine to determine the ROE. |
| "Average" performance | is not necessarily good. |
| Seasonal factors | can distort ratios. |
| Window dressing | techniques can make statements and ratios look better |
| Different accounting and operating practices | can distort comparisons. |
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