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Solution for Business Analysis and Valuation: Text and Cases 1st Edition Chapter 10, Problem 1

by Paul M., Palepu, Krishna G., Peek, Erik Healy
179 Solutions 11 Chapters 43156 Studied ISBN: 9781408056424 Accounting 5 (1)

Chapter 10, Problem 1 : 1. What are the critical performance dimensions for...

1. What are the critical performance dimensions for (a) a retailer and (b) a financial services company that should be considered in credit analysis? What ratios would you suggest looking at for each of these dimensions?

Step-By-Step Solution

1. The critical performance dimensions of a retailer are related to its inventories turnover and profit margins. Inventories turnover ratio is the cost of sales divided by average inventories balance. One measure of margins is net profit divided by sales.

The critical performance of a financial services company includes the quality of assets (e.g., default risks of loan portfolio), duration matching between assets and liabilities (i.e., its risk to interest rate change), and profitability. The quality of loans that financial institution holds can be measured as bad debt allowance divided by loans outstanding.  Risk exposure can be measured by comparing the duration between assets and liabilities. Profitability can be measured as net profit divided by net worth.

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