Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This document will use a variety of these ratios to analyze the firm, Sample Company, as of December 31,2000.

The ratios returns on investment (ROI) and return on equity (ROE) are two of the most popular measure of profitability of a company and, along with the P/E ratio, have the most significant value of any of the ratios. The DuPont Model expands on the ROI calc

The debt ratio is simply the ratio of total liabilities to the total liabilities and owners equity.

Sample Companies’ Profitability Ratios

For Sample Co. the working capital is $4,006 – $2,758 = $1,248, the current ratio is $4,006 / $2,758 = 1.45, and the acid test ratio is $155 + $2,174 / 2,758 = .84.

Two main financial leverage measures are debt ratio and debt/equity ratio. These indicate the extent that the firm is using financial leverage. The higher the ratios the more risk the company is exposing itself to, especially as the return on investment falls closer to the cost of borrowing. As a rule, most companies will keep the debt in their capital structure to a maximum of 50% of the total capital.

Some topics in this essay:
Sample Co, DuPont Model, Leverage Measures, Sample CO, ROI ROE, Sample Company, Turnover Inventory, Ratios Liquidity, Model DuPont, ROI American, current ratio, profitability ratios, sample co, debt ratio, financial leverage, acid-test ratio, debt equity ratio, dividend payout, operating income, dupont model, sample companies’, companies’ profitability ratios, ratio acid-test ratio, sample companies’ profitability, price earnings ratio,