Lesson 4

• Ratio analysis, involved methods of calculating and interpreting financial ratios to analyze and monitor the firm's performance
• Current and prospective shareholders are interested in the firm's current and future level of risk and return, which directly affect share price.
• Creditors are interested in the short-term liquidity of the company and its ability to make interest and principal payments
• Management is concerned with all aspects of the firm's financial situation, it attempts tp produce financial ratios that will be considered favorable by both owners and creditors.
• Cross-sectional analysis is the comparison of different firms' financial ratios at the same point in time; involves comparing the firm's ratios to those of other firms in its industry or to industry averages
• Benchmarking is a type of cross-sectional analysis in which the firm's ratio values are compared to those of a key competitor or group of competitors that it wished to emulate
• time-series analysis is the evaluation of the firm's financial performance over time using financial ratio analysis
• Ratios standardize number and facilitate comparisons
• Ratios are used to highlight weaknesses and strengths
• Ratio comparisons should be made through time and with competitors
• ROA = Return in Assets
• ROE = Return in Equity