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STUDY UNIT TWELVE

1. Asset management ratios – measure an entity’s ability to generate income. Inventory turnover and accounts receivable turnover are two good indicators.

2. Common-size financial statements – compare entities of different sizes, or a single entity over a number of periods, by expressing financial statement items as percentages; may be used for both vertical and horizontal analysis.

3. Comparative analysis – includes horizontal analysis that measures trends over time, and vertical analysis that makes comparisons between different entities during one period.

4. Financial analysis – separating and distinguishing the component parts of financial data leading to the discovery and understanding of their nature, the interrelationships between the components, and the implications of these interrelationships. Allows you to better understand the entity and how it will likely develop, as well as isolate problems and solutions.

5. Horizontal analysis – a comparison or measurement of financial statements for one company over more than one year.

6. Leverage ratios – measure use of debt to finance assets and operations. Examples include debt-to-equity ratio, debt ratio, and leverage factor.

7. Limitations of ratio analysis – Constraints include a variety of factors, such as accounting methods, industry factors, and economic factors. Furthermore, ratio analysis is only as useful as the data used and may be based on estimates, errors, or fraud. Lastly, proper choice of comparison ratios is very necessary to extract reliable and accurate data from the comparisons.

8. Liquidity ratios – measure the short-term viability of an entity, the ability to pay its obligations, and thereby continue operations. Current ratio and working capital ratio are two examples.

9. Profitability ratios – measure an entity’s profitability and changes in performance, including profit margin on sales, earnings per share, and growth ratios.

10. Valuation ratios – measure the value of an entity, including book value per common share and price-earnings ratio.

11. Vertical analysis – a comparison or measurement of financial statements relating to one period but for multiple companies.