Appendix: Financial Ratios Introduction to MIS Appendix: Financial Ratios

Appendix: Financial Ratios Goals Highlight relationships among financial accounts Compare firms within industries Categories Profitability Liquidity Activity Leverage (debt) DuPont Analysis Margin versus Quantity

Profitability Ratios Higher is better. Except a high P/E ratio might indicate that a stock is overpriced in the market.

Liquidity Ratios Higher is better. Except too high implies excess cash on hand--which should be invested.

Activity Ratios Low implies excess capacity or poor sales. Low implies poor inventory management or weak sales. Low implies poor management of collections.

Leverage Ratios Highly variable, depending on management and industry. Low implies problems with covering debt payments.

DuPont Analysis Choice: sell at high profit margin, or high volume.