ACCT 110 Lecture Notes - Lecture 3: Santa Barbara City College, The Monthly, Financial Statement
Document Summary
Strategically, companies need to identify risks in doing business, and then manage them in order to take advantage of opportunities and maximize shareholder value. Ratio analysis helps in assessing operating and financial risks by expressing the relationship between selected financial statement data. Qualitative information from financial statements is gathered by examining relationships between items on the statements and identifying trends in these relationships. Often expressed in terms of a percentage, a rate, or a simple proportion. The key to a useful analysis is to have a good understanding of the business, business risks, and industry. Activity ratios: measure how effectively the enterprise is using its assets. Also measures how liquid certain assets like inventory and receivables are (how fast their value can be realized). Profitability ratios: measure financial performance and shareholder value creation for a specific time period. Coverage ratios: measure the degree of protection for long-term creditors and investors or a company"s ability to meet its long-term obligations.
