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Finance & Accounting
Pages 3 (753 words)
On Ratio Analysis Ratios analysis is a set of techniques used to assess the financial ratios of a firm pertaining to liquidity, debt, and profitability (Gibson 1982). The analysis focuses on the interpretation of indicators or tools or financial ratios through which an analyst can evaluate the investment worthiness of a firm (Gibson 1982).
Suppose we want to assess the financial health of a very large or small firm, how can we analyze the firm so our analysis can provide an insight into the basic prospects for profitability of a firm? Is the firm losing or is it profitable? Are there prospects for making the firm profitable? Is the firm worth buying? Should we sell the firm? If we are to sell the firm, at what price should our purchase price be? How large are the firm’s debts? What are its prospects for profitability? What is the firm’s net worth? These are some of the questions in which ratio analysis can help provide an answer. Gibson (1982, p. 18) pointed out that the financial “ratios can be grouped into four categories: liquidity, debt, profitability, and other” financial ratios. The liquidity ratios include the working capital ratio, and the current ratio (Gibson 1982, pp. 18-19). Some of the broad debt ratios include the debt-to-capital and the debt-to-equity ratios. The debt-to-capital ratios used by many firms include the long term debt-to-long term debt plus stockholders’ equity, short term debt plus long-term debt-to-short term debt plus long-term debt plus stockholders’ equity, and several other ratios (Gibson 1982, p. 22). ...
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