Financial Ratio Analysis and Inflation: A Comprehensive Guide

Dividing Users of Ratios: Short-term Lenders, Long-term Lenders, Stockholders

1.If we divide users of ratios into short-term lenders, long-term lenders, and stockholders, which ratios would each group be most interested in, and for what reasons?

2.Explain how the Du Pont system of analysis breaks down return on assets. Also explain how it breaks down return on stockholders’ equity.

3.If the accounts receivable turnover ratio is decreasing, what will be happening to the average collection period?

4.What advantage does the fixed charge coverage ratio offer over simply using times interest earned? 

5.Is there any validity in rule-of-thumb ratios for all corporations, such as a current ratio of 2 to 1 or debt to assets of 50 percent?

6.Why is trend analysis helpful in analyzing ratios? 

7.Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions.

a.Return on investment

b.Inventory turnover

c.Fixed asset turnover

d.Debt-to-assets ratio

8.What effect will disinflation following a highly inflationary period have on the reported income of the firm?

9.Why might disinflation prove favorable to financial assets? 

10.Comparisons of income can be very difficult for two companies, even though they sell the same products in equal volume. Why?