Liquidity, Solvency, and Leverage Ratios - Common-Size Financial Statements
3 important questions on Liquidity, Solvency, and Leverage Ratios - Common-Size Financial Statements
What happens when a ratio is greater than one, after a change of equal dollar amount on both the numerator and denominator?
When the ratio is greater than one, any change of equal dollar amount on both the numerator and denominator will result in a lowering of the overall ratio since the denominator will increase by a proportionally greater amount.
What are useful techniques for assessing the persistence of the firm's revenues?
Useful techniques for assessing the persistence of the firm's revenues are:
(1) Trend percentage analysis.
(2) Evaluation of MD&A (Management's Discussion and Analysis, a section of the annual report).
(1) Trend percentage analysis.
(2) Evaluation of MD&A (Management's Discussion and Analysis, a section of the annual report).
When are common-size financial statements useful?
Common-size financial statements are useful:
- to analyze differences among companies of various sizes
- for comparisons between a similar company and an industry average
- for diversified firms,
- for steadily growing firms,
- when markets and product lines have differing rates of
- growth,
- potential,
- profitability.
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