# Financial Ratio Analysis

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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.

#### In this essay, the author

• 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.