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Literature Review (Financial Ratios)
Finance & Accounting
Pages 8 (2008 words)
Literature review Introduction The second chapter of the research study presents important theoretical concepts that would be used to answer the research questions of the study. In the literature review, important financial ratios and their implications along with their usage have been explained.
Therefore management calculates and uses financial ratios to identify the performance gap of the firm against its own past performances as well as against the performance of competing firms in the industry (Johnson, & Scholes 2001). In addition to this, management uses to analyse the financial performance of the firm against the average financial ratios of the firms operating in the industry as well and then identify areas where the firm has not been performing up to the mark. Some organisations use the financial ratios for the purpose of benchmarking as well and they tend to set different targets for different kinds of financial ratios and then make efforts to achieve these financial ratios (Brinckerhoff, 2000). For instance, a firm would like to achieve a profit margin of 20% and therefore in order to achieve this profit margin, the company would be making efforts to reduce the cost of the company or generate more sales so that costs is allocated to more sold units and targeted profit margin is achieved. ...
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