Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133508079
Author: Gitman
Publisher: PEARSON
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Textbook Question
Chapter 3.8, Problem 3.18RQ
Financial ratio analysis is often divided into five areas: liquidity, activity, debt, profitability, and market ratios. Differentiate each of these areas of analysis from the others. Which is of greatest concern to creditors?
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Financial ratios can be divided into four categories, depending upon the purpose of the analysis. Discuss the four categories: internal liquidity, operating performance, risk analysis and growth analysis.
Financial Ratios are grouped into five main categories: Liquidity ratios, Leverage ratios, Efficiency ratios, Profitability ratios and Market value ratios.
Explanation and Examples
Ratio Analysis is the process of identifying the financial strengths and weaknesses of the enterprise by logically establishing relationship between the items of Balance Sheet or Income Statement or both and interpreting the results there of in order to derive meaningful conclusions.
In view of the requirement of various users (e.g., Short-term Creditors, Long-term Creditors, Management & Investors) of the ratios, one may classify ratios into the following four groups:
a) Liquidity Ratios
b) Solvency Ratios
c) Activity Ratios
d) Profitability Ratios
You are required to pick any two from the aforementioned groups and discuss the various ratios calculated under these along with the purpose or objective of calculation of the individual ratios you are alluding to.
Chapter 3 Solutions
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Ch. 3.1 - Prob. 1FOECh. 3.1 - Prob. 2FOECh. 3.1 - Prob. 3.1RQCh. 3.1 - Describe the purpose of each of the four major...Ch. 3.1 - Prob. 3.3RQCh. 3.1 - Prob. 3.4RQCh. 3.2 - With regard to financial ratio analysis, how do...Ch. 3.2 - What is the difference between cross-sectional and...Ch. 3.2 - Prob. 3.7RQCh. 3.2 - Prob. 3.8RQ
Ch. 3.3 - Under what circumstances would the current ratio...Ch. 3.3 - In Table 3.5, most of the specific firms listed...Ch. 3.4 - To assess the firms average collection period and...Ch. 3.5 - What is financial leverage?Ch. 3.5 - What ratio measures the firms degree of...Ch. 3.6 - What three ratios of profitability appear on a...Ch. 3.6 - Prob. 3.15RQCh. 3.6 - Prob. 3.16RQCh. 3.7 - Prob. 3.17RQCh. 3.8 - Financial ratio analysis is often divided into...Ch. 3.8 - Prob. 3.19RQCh. 3.8 - What three areas of analysis are combined in the...Ch. 3 - Prob. 1ORCh. 3 - Learning Goals 3, 4, 5 ST3-1 Ratio formulas and...Ch. 3 - Prob. 3.2STPCh. 3 - Prob. 3.1WUECh. 3 - Learning Goal 1 E3-2 Explain why the income...Ch. 3 - Prob. 3.3WUECh. 3 - Prob. 3.4WUECh. 3 - Learning Goal 6 E3-5 If we know that a firm has a...Ch. 3 - Financial statement account identification Mark...Ch. 3 - Prob. 3.3PCh. 3 - Prob. 3.4PCh. 3 - Prob. 3.5PCh. 3 - Prob. 3.6PCh. 3 - Prob. 3.8PCh. 3 - Prob. 3.9PCh. 3 - Prob. 3.10PCh. 3 - Prob. 3.11PCh. 3 - Learning Goals 2, 3, 4, 5 P3-10 Ratio comparisons...Ch. 3 - Prob. 3.13PCh. 3 - Prob. 3.14PCh. 3 - Accounts receivable management The table below...Ch. 3 - Prob. 3.18PCh. 3 - Prob. 3.20PCh. 3 - The relationship between financial leverage and...Ch. 3 - Prob. 3.22PCh. 3 - Prob. 3.23PCh. 3 - Prob. 3.24PCh. 3 - Prob. 3.25PCh. 3 - Prob. 3.27PCh. 3 - Prob. 1SE
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- What are the two most common receivables ratios, and what do these ratios tell a stakeholder about the company?arrow_forwardCalculate the projected debt ratio, debt-to-equity ratio, liabilities-to-assets ratio, times-interest-earned ratio, and EBITDA coverage ratios. How does Computron compare with the industry with respect to financial leverage? What can you conclude from these ratios?arrow_forwardWhich of the following ratios is used to measure a firms profitability? a. Liabilities Ă· Equity c. Sales Ă· Assets b. Assets Ă· Equity d. Net Income Ă· Net Salesarrow_forward
- Business ratios of financial statements are generally categorized as one of the following areas, EXCEPT Select one: a. Leverage b. Profitability c. Net Present Value d. Liquidity e. Efficiency (or Activity)arrow_forwardWhen analyzing financial statements, creditors are more concerned with which of the following? a. Liquidity ratios b. Solvency ratios c. Profitability ratios d. Both a and barrow_forwardMatch the ratio to the building block of financial statement analysis to which it best relates.A. Liquidity and efficiency B. Solvency C. Profitability D. Market prospects Debt-to-equity ratioarrow_forward
- Debt-equity ratio is a sub-part of Select one: a. Liquidity ratio b. Solvency ratio c. Profitability ratio d. Efficiency ratioarrow_forwardIdentify the major types of financial ratios and what they measure.arrow_forwardIdentify five limitations of ratios as a tool of financial analysis.arrow_forward
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Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License