Financial Analysis Essay

1187 Words Apr 28th, 2012 5 Pages
Rachelle Stanley
Columbia College
FINC 350

A firm’s performance and financial situation is measured by financial ratios. In order to reach these ratios a financial analysis must be done on the company’s financial information. Financial analysis is the evaluation, selection and interpretation of financial data to assist in investment and financial decision-making. Financial data is drawn from many sources however, the primary source is data that is provided by the company in its annual reports. These annual reports consist of the income statement, the balance sheet and the statement of cash flows. Financial ratios can be used to analyze trends and compare the firm’s financial standing to those of other firms. Financial ratios are
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Any number 3 or above could mean that management has too much cash on hand and may be doing a poor job of finding ways to invest. By reading the annual report or the 10K you can see what executives plans are for future investments. A current ratio below 1 may be a sign that the company may have trouble paying its bills on time. Only companies that have inventory that can immediately be converted into cash should have a current ratio below 1.
Quick Ratio
The quick ratio, also known as acid test, is calculated by subtracting inventory from current assets divided by current liability. This ratio indicates a company’s ability to satisfy current liabilities with liquid assets. Current assets used in the quick ratio are cash, accounts receivable and notes receivable. Any quick ratio less than 1.00X would require the company to sell their inventory to meet its obligations. Lenders are very interested in quick ratio because inventory is not included, which is not converted to cash easily. USD IN MILLIONS | 2008-1 | 2009-1 | 2010-1 | 2011-1 | 2012-1 | Target

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