Respond to the following questions thoroughly, in 150-300 words for each questio

Question

Respond to the following questions thoroughly, in 150-300 words for each question. Use your textbook as your first and major reference. Ratio analysis involves calculations that use the data from the financial statements to evaluate the performance of companies in different key areas. How would this information be used by a credit analyst as compared to someone is going to make an investment decision? Of what significance is the DuPont system in the analysis of a firm’s financial position? How is the DuPont system used when evaluating a firm? What recent government regulations have helped or hindered a firm’s ability to conduct its normal course of business, especially in the area of reporting requirements?Be sure to explain your answers thoroughly, use specific examples, and cite your sources.

Explanation / Answer

Introduction:

Financial ratios represent the relationship between the statements of finance and the items in it. While it provides the historical data sets, the management makes use of ratios to determine the internal strength and weakness of the firm and makes projections of the future financial performance. Investors make investment decisions by comparing the financial ratios of companies performing in the same industry. Ratios are not just the numbers which don't make sense when they are just seen as numbers. But they add meaning to it when compared with the historical data points and industry averages. There are four financial ratios that we can use to determine the performance of the organization. They are Liquidity ratio, Solvency ratio, Profitability ratio and Efficiency ratio. Let us see each of these ratios and the corresponding interpretation of the same in terms of measuring the performance of an organization.

A credit analyst as compared to someone shall make an investment decision with the help of the Solvency Ratio of the ratio analysis.

The significance of the DuPont system in the analysis of a firm’s financial position:

DuPont analysis is a type of measuring performance which was originated by Dupont Corporation. Here assets are valued as their gross book value instead of net book value that produces a higher return on equity. Based on this analysis, ROE is affected by 3 things… Operating efficiency which is characterized by profit margin. Asset uses its efficiency which is a measure of the total asset turnover ratio and the equity multiplier.

Mathematical form of DuPont analysis is given by,

ROE = Profit Margin x Asset Turnover Ratio x Equity Multiplier.

The government regulations have helped an organization’s ability to conduct its normal course of business in the area of reporting requirements by the measure of the Profitability Ratio of its business…

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