FINANCIAL MANAGEMENT FOR M.B.A (FOREIGN TRADE 5 YRS ) – SEMESTER 6

UNIT 3 – FINANCIAL RATIOS
Standardized Financial Statements a. Ratio Analysis b. The Du Pont Identity c. Using Financial Statement Information Key Concepts and Skills Know: – How to standardize financial statements for comparison purposes – How to compute and interpret important financial ratios – The determinants of a firm’s profitability and growth Understand the problems and pitfalls in financial statement analysis Standardized Financial Statements – • Common-Size Balance Sheets – All accounts = percent of total assets (%TA) • Common-Size Income Statements – All line items = percent of sales or revenue (%SLS) • Standardized statements are useful for: – Comparing financial information year-to-year – Comparing companies of different sizes, particularly within the same industry Prufrock Corporation - Balance Sheets - Table 3.1 –

P.S CHANDIRAMANI @ S.O.C, D.A.V.V, INDORE - 2014

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Prufrock Corporation - Common-Size Balance Sheets - Table 3.2 –

Prufrock Corporation - Income Statement - Table 3.3 –

Prufrock Corporation - Common-Size Income Statement - Table 3.4 – Tells us what happened to each dollar of sales

P.S CHANDIRAMANI @ S.O.C, D.A.V.V, INDORE - 2014

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Ratio Analysis – • Allow for better comparison through time or between companies • Used both internally and externally • For each ratio, ask yourself: – What the ratio is trying to measure – Why that information is important Categories of Financial Ratios – • Liquidity ratios or Short-term solvency • Financial leverage ratios or Long-term solvency ratios • Asset management or Turnover ratios • Profitability ratios • Market value ratios Table 3.5 –

P.S CHANDIRAMANI @ S.O.C, D.A.V.V, INDORE - 2014

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Using Ratio Analysis –

ASSETS Current Assets Cash Accounts Receivable Inventory Total

$ $ $ $