Financial_Analysis(3)

Determinants of Firm Value and Ratio Analysis Profitability and growth drive firm value. Managers can employ four levers to achieve growth and profit targets:– – – – Operating management Investment management Financing strategy Dividend policy

Ratio analysis seeks to evaluate the firm’s effectiveness in these areas.

Ratio Analysis Evaluating ratios requires comparison against some benchmark. Such benchmarks include:– Ratios over time from prior periods (time series) – Ratios of other firms in the industry (cross-sectional) – Some absolute benchmark

Effective ratio analysis must attempt to relate underlying business factors to the financial numbers The text illustrates ratio analysis by applying it to Wal-Mart stores.

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