CHAPTER 7
FINANCIAL ANALYSIS TECHNIQUES
LEARNING OUTCOMES
After completing this chapter, you will be able to do the following:
- describe tools and techniques used in financial analysis, including their uses and limitations;
- classify, calculate, and interpret activity, liquidity, solvency, profitability, and valuation ratios;
- describe relationships among ratios and evaluate a company using ratio analysis;
- demonstrate the application of DuPont analysis of return on equity, and calculate and interpret effects of changes in its components;
- calculate and interpret ratios used in equity analysis and credit analysis;
- explain the requirements for segment reporting, and calculate and interpret segment ratios;
- describe how ratio analysis and other techniques can be used to model and forecast earnings.
1. INTRODUCTION
Financial analysis tools can be useful in assessing a company's performance and trends in that performance. In essence, an analyst converts data into financial metrics that assist in decision making. Analysts seek to answer such questions as: How successfully has the company performed, relative to its own past performance and relative to its competitors? How is the company likely to perform in the future? Based on expectations about future performance, what is the value of this company or the securities it issues?
A primary source of data is a company's annual report, including the financial statements ...
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