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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

Solutions

Chapter
Section
Chapter 4, Problem 1Q
Textbook Problem

Financial ratio analysis is conducted by three main groups of analysts: credit analysts, stock analysts, and managers. What is the primary emphasis of each group, and how would that emphasis affect the ratios on which they focus?

Expert Solution
Summary Introduction

To explain: Primary emphasis of the three groups of analysts and the way that emphasis affect the ratios on which they focus.

Introduction:

Financial Ratio Analysis: Financial ratio analysis is one of the tools of financial analysis of a firm. It represents the relationship between two or more items of the financial statement.

Answer to Problem 1Q

Primary emphasis of three groups,

  • Credit analysts: Credit analyst’s main emphasis is on analyzing the credit worthiness, liquidity and solvency of the firm, which can be analyzed through the total asset to debt ratio, debtor turnover ratio and creditor turnover ratio.
  • Stock analysts: Stock analysts are interested in the firm’s earning capacity, profitability and risk factors. These factors can be analyzed from earning per share, price/earnings ratio and return on equity.
  • Managers: Managers of the firm are interested to know the overall condition of the firm that is the liquidity, solvency and profitability, so, all the ratios are required by the managers to make their plans and decisions.

Explanation of Solution

  • Financial ratio analysis is an effective tool of financial analysis of a firm; it can be used by various groups of users to analyze the firm’s condition.
  • Some are interested to know the firm’s long run condition while another wants to know the short run condition of the firm.
  • There is a wide variety of ratio’s which provides the required information about the financial health of the firm.
Conclusion

So, the primary emphasis of the three groups of analysts is liquidity, solvency and profitability.

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Chapter 4 Solutions

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