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Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This document will use a variety of these ratios to analyze the firm, Sample Company, as of December 31,2000. Financial Statement Ratios Profitability Ratios The ratios returns on investment (ROI) and return on equity (ROE) are two of the most popular measure of profitability of a company and, along with the P/E ratio, have the most significant value of any of the ratios. The DuPont Model expands on the ROI calculation by inserting sales and it's relationship to the companies' generation of profits and utilization of assets into the calculation. Additional profitability ratios include the price earnings ratio (P/E), the dividend payout and the dividend yield. The price earnings ratio helps to indicate to investor how expensive the shares of common stock of a firm are. Dividend yield is part of the stockholders ROI and is represented by the annual cash dividend. Dividend yields have historically been between 3% to 6% for common stock and 5% to 8% for preferred stock. Dividend payout ratio shows the proportion of the earnings paid to common shareholders. Dividend payout for manufacturing companies range from 30% to 50%, but can vary widely. Dupont Analysis (ROI) - Return on Investment The return on Investment (ROI) is important because it describes the rate of return the company was able to... ... middle of paper ... ... ratios, should be assessed over time in order to verify their meaning. Sample Company For our Sample Co. there are several ratios that are low, for the average manufacturing company. The ROI and ROE are below average as are the current ratio and the acid-test ratio. The P/E ratio is $42 / $3.51 = 12, which seems very good and both the debt ratio and debt to equity ratio are within the guideline. With the good and bad of these ratios hard to tell what sort of industry this is. With the ROI, ROE, and acid-test low like they are it doesn't seem like a retailer/merchandising company, and a e-commerce for 2000 would probably have a P/E greater than 12. What that leaves is an international service company of some kind, so I'll go with that. Marshall, D. H., McManus, W. W, & Viele, D. (2002). Accounting: What the Numbers Mean. 5th ed. San Francisco: Irwin/McGraw-Hill.

- Explains that before beginning an analysis of a company, it is necessary to have financial statements for the past few years so historical trends can be obtained. ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage.
- Explains that the dupont model expands on the roi calculation by inserting sales and its relationship to the companies' generation of profits and utilization of assets into the calculation.

- Explains that before beginning an analysis of a company, it is necessary to have financial statements for the past few years so historical trends can be obtained. ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage.
- Explains that the dupont model expands on the roi calculation by inserting sales and its relationship to the companies' generation of profits and utilization of assets into the calculation.
- Explains that the return on investment (roi) is important because it describes the rate of return the company was able to make on its assets.
- Explains that the return on equity conveys the profits of the company as a rate of return. roe uses average owners equity over the specified time period and net income.
- Explains that p/e ratios in the range of 12 to 18 have been considered good for a company for many years, but they've been abandoned in recent years.
- Analyzes how inventory turnover, number of days sales in ar and turnover in building, equipment, and land indicate how efficiently a firm is using its assets in relation to its roi.
- Explains that inventory turnover uses costs of good sold / average inventory and is an indicator of the firms' management practices.
- Explains that the number of days in accounts receivable is an indication of how well the companies collection policies are.
- Explains that the higher the turnover or a lower number of days sales in ar the greater the efficiency.
- Explains that financial leverage measures are debt ratio and debt/equity ratio. the higher the ratios, the more risk the company is exposing itself to.
- Explains the debt ratio, which is the ratio of total liabilities to liabilities and owners equity.
- Explains that the debt equity ratio is the ratio of total liabilities to the total and owners equity only.
- Explains that sample co.'s debt ratio is $1,287 / $4,852 = 26.5% and its debt-to-equity ratio at $3,565 = 36.1%. both are well below the 50% guideline.
- Explains that liquidity is a firm's ability to meet its current obligations. firms that are termed liquid generally have enough cash to pay their upcoming payments.
- Explains that working capital is the excess of the firm's current assets over its current liabilities. firms with a positive work capital are generally said to be in good financial health.
- Explains that the current ratio is simply the current assets divided by current liabilities. the higher the ratio, the better indication of a company's debt-paying ability.
- Explains that the acid-test ratio is a better, more conservative measure of liquidity.
- Explains that trends are another important factor here. the company has good and not so good points, but some ratios can be misleading.
- Explains that sample co.'s roi is $350 / $7,196, which is 4.8% using net income, and the dupont model.
- Explains sample co.'s working capital is $4,006 $2,758 = $1,248, the current ratio and the acid test ratio are slightly low.
- Explains that for sample co., there are several ratios that are low, for the average manufacturing company. the roi, roe, and acid-test ratio are below average.

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