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Chapter 3

# MGMT 3320 Chapter Notes - Chapter 3: Disinflation, Asset Turnover, Cash Conversion Cycle

Department
Management
Course Code
MGMT 3320
Professor
Elliot Currie
Chapter
3

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Chapter 3: Financial Analysis 01/27/2016
Outline
What is financial analysis
4 categories of financial ratios
techniques of ratio analysis
distortion in financial reporting
summary and conclusions
Learning Objectives
1. Calculate 13 financial ratios that measure profitability, asset
utilization, liquidity and debt utilization
2. Assess a company’s source of profitability using the DuPont system
of analysis
3. Examine the ratios in comparison to industry averages
4. Examine the ratios and company performance by means of trend
analysis
5. Interpret ratios and identify corrective action for abnormal results
6. Identify sources of distortion in reported income
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Notes 01/27/2016
LO 1:
Ratio Analysis
What is Financial Analysis?
Financial Ratios are used to
oWeigh and evaluate the operating performance of the firm
now and in the past
oJudge comparative performance between firms
oDetermine relative as opposed to absolute performance
Calculating ratios to reveal relationships between different accounts
of financial statements, and to measure and judges acceptability in
relation to other values.
Should be supplemented with an evaluation of company
management, physical facilities, and other factors.
Linking ratios to reveal the factors determining a firms profitability
and value. We often use ratios of the past financial performance to
determine our expectations regarding the firms future success.
inquiry
Techniques of Ratio Analysis
DuPont Analysis
Comparative Analysis
Trend Analysis
Common-Size Statements
Ratios for Comparative Purposes
Comparative ratios are available from many sources, usually for a
fee, these include;
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“industry Norms and Key Business Ratios”
oRobert Morris: data on over 100,000 commercial bank
borrowers, 600 categories
oFinancial Post DataGroup: SIC, publicly traded companies,
industry reports in 24, S&P, GICS (global industry
classification standard)
oStatistics Canada: ratios for major industry groups in
available at Regional Reference Centers
oIndustry Association: i.e. the Canadian Association of
Classification System of Financial Ratios
A. Profitability Ratios
B. Asset Utilization Ratios
C. Liquidity Ratios
D. Debt Utilization Ratios
A. Profitability Ratios
1. A. Profit Margin
1. B. Gross Profit Margin
2. Return on Assets (ROA) (investment ROI)
3. Return on Equity (ROE) (common shareholders)
Shows how profitable a company is and the efficiency or
performance of the firm
Measure return (profit) on sales, total assets, and shareholders
capital
Examine the effective employment of resources
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