StudentShare solutions
Triangle menu

Financial Ratios - Essay Example

Nobody downloaded yet

Extract of sample
Financial Ratios

The financial statement prepared with the help of financial ratios is an aid to find out the efficient operation of the business for the share holders, competitors, and outsiders who are willing to invest in the firm. These ratios play a key role in calculating the dividend to shareholders, interest to debenture holders, as well as the tax payable to government. They also express the risk factor and bankruptcy chances of the firm. Theory of Financial Ratios There have been no convincing theories on financial ratios over the years. Horrigan (1965), writes on how the financial ratios were originated and how the theories were not. He says that a unique outcome of the accounting evolution in the United States was the development of financial ratios which helped in analyzing accounting statements. Such ratios were originally formulated for using as short-term credit analytical devices. The origin of such ratios can be traced out as far back as the late 19th century. A number of various financial ratios were developed by the analysts in the early decades of the century. The next step after the formulation of such ratios was the development of body of empirical generalization about such financial ratios which later turn out to be the hypothesis for drawing out theory of financial ratio analysis. However, the materialization of a system of empirical generalization never happened, much less a theory (Horrigan, 1965). Sources of Information for the Calculation of Financial Ratios There are a number of sources for the collection of the information for financial ratio analysis. The Profit and Loss Account and the Balance Sheet serves as the main source for information. Some of the most commonly used sources for accumulating information for analysis are given below. Trial Balance Trading Account Profit and Loss Account Profit and Loss appropriation Account Income Statement Cash-flow Statement Fund-flow Statement Balance Sheet Bank Statements Categories of Financial Ratios. There are numerous financial ratios used in the financial statements and policies. These ratios are categorized on the basis of information they give. Some of the frequently used ratios are: Profitability ratios, Dividend Policy ratios, Asset turnover ratio, Liquidity ratio and Leverage ratio. Profitability Ratio: - The profitability ratio expresses the success of the firm and the profit margin of the firm. The profitability ratio includes Gross Profit Margin, Return on Asset (ROA), Return on Equity (ROE), etc. The gross profit margin is used to determine the gross profit earned over sales, considering only the cost of goods sold and excluding all other items. Gross Profit Margin = Sales – Cost of goods Sold Sales Dividend Policy Ratios: - The dividends to the share holders are paid out in the most suitable way using the dividend Policy Ratios. The generally used ratios are Dividend Yield Ratio and Payout Ratio. Dividend Yield Ratio = Dividend per Share Share Price Payout Ratio = Dividends per Share Earnings per Share Asset Turnover Ratios: - The efficiency in utilizing the assets of the business is pointed out by the Assets Turnover Ratios. One of the commonly used Asset Turnover ratios is Receivables Turnover ratio indicating the speed of collecting the accounts receivable of the firm. Receivables Turno ...Show more

Summary

Financial Ratios (College) Financial Ratios Introduction Financial ratios, often called accounting ratios are used in the financial analysis by comparing two financial items extracted from the financial statements. Financial ratio is defined as “The relationship between two accounting figures expressed mathematically”…
Author : rkessler
Financial Ratios Essay essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Financial Ratios Essay"
with a personal 20% discount.
Grab the best paper

Check these samples - they also fit your topic

Use of Financial Ratios
Finance and Accounting Ratio analysis is a useful tool for analyzing a company, to predict about its future, but the result might get wrong if the factors of the variables are not taken in consideration. LEV and Sunder (1979) raised some basic questions like the structural relationship of the analyzed firms, the size of the firm; these factors are taken in consideration or not.
4 pages (1000 words) Essay
Methodological issues with financial ratios
In the year 1979 in their research paper Lev and Sunder raised the issue that the ratio analysis done by the researcher is often motivated by the tradition and convenience, they generally not consider the theoretical background of the variables of the concerned ratio.
5 pages (1250 words) Essay
The Benefits of Understanding Financial Ratios
In examining these elements, the article notes the high importance analysts place on financial rations as a determinant of these financial statements. A survey of Chartered Financial Analysts (CFAs) was conducted regarding their views of these financial ratios.
3 pages (750 words) Essay
Financial Ratios
You can use them to examine the current performance of your company in comparison to past periods of time, from the prior quarter to years ago. Frequently this can help you identify problems that need fixing. Even better, it can direct your attention to potential problems that can be avoided.
7 pages (1750 words) Essay
Financial Ratios Discussion
Short term debt makes up approximately 60% (A) and 80% (B) of total. Taking into account high ratio of fixed assets turnover, we can assume the industry is not very fixed capital-intensive. Nevertheless, it requires short-term financing, for example for the needs in working capital when the collection period increases.
3 pages (750 words) Essay
Financial Management - Ratios comparision
Efforts have been made to make a constructive analysis subject to the limitations of ratio analysis, so that appropriate predictions are made and additional information is made available to a
8 pages (2000 words) Essay
Financial ratios
Industry comparison is another method wherein the firm’s ratios are compared with the average ratios of the industry to explore what is the standing of the
2 pages (500 words) Essay
Financial ratios analysis
According to this plan, they will not send any waste to landfill by 2012. (Marks & Spencer, 2010) The company offers clothing and food, as well as home ware, furniture and technology. The company gained recognition and importance in the British business
4 pages (1000 words) Essay
FINANCIAL RATIOS
strates a company’s ability to pay off its short term obligation/ current liabilities (amount due within 12 months time) with the current assets that it holds (Bpp Learning Media, 2009). Gearing is an essential element which helps in deciding upon the balance between equity
1 pages (250 words) Essay
Financial Ratios
The analysis will then proceed to determining the better company for investment based on the analysis developed. Such an analysis is useful
6 pages (1500 words) Essay
Hire a pro to write
a paper under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Click to create a comment