Got a tricky question? Receive an answer from students like you! Try us!

Understanding the Concepts - Assignment Example

Only on StudentShare
Finance & Accounting
Pages 4 (1004 words)


Financial ratios help an organization to make financial, management and investment decisions, since they present information based on the time value of money, where the present value differs from the future money value (Bangs, 1992)…

Extract of sample
Understanding the Concepts

Understanding the Concepts

Quick ratios are the other important ratios for the small business, where the current assets of a business entity, with an exception of the inventories, are compared to the current liabilities to determine how best the business is placed in meeting its current cash payment obligations. Profitability ratios are also vital for a small business, since they help the business determine how much profits it has generated within a specified period of business operation (Bangs, 1992). In so doing, the business understands its performance, ranging from the effectiveness of its operations to how well the business is placed to compete with other businesses of its nature, serving the same market segment. Through the creation of such insights, developed from the analysis of financial ratios, a business makes suitable, tactical and strategic decisions that help it thrive in the market while improving on its operations effectiveness; customer needs satisfaction and profitability (Horcher, 2005).
These ratios compares with those applied by large corporations in that, the same ratios are applied by the large corporations for the same reasons, as are for the small businesses. Thus, such ratios are equally important to the managers of large corporations, as they are to the owner managers of small businesses. However, some financial ratios are more appropriate to aid the process of making decisions in large corporations. ...
Download paper
Not exactly what you need?

Related Essays

Understanding the Concepts
Concept of NPV/Payback Rule: The concept of NPV or Net Present Value of a particular investment represents the difference in its market value and its actual cost. The value of NPV is determined by estimating the present value of those cash flows that shall take place in the future. The cost is then deducted from the resultant to obtain the value of the NPV. According to the payback rule, a particular cutoff is selected and if the payback period is less than that cutoff, the project proves to be good to undertake. A payback period represents the time period when the cost of the project becomes…
4 pages (1004 words)
Understanding the Concepts
A current ratio is considered good if is above 1.0. Another ratio of importance for small business owners is net margin. The net margin is a financial metric that measures the absolute profitability of a company. It is calculated diving net income by total sales. A third ratio I would emphasis is return on assets (ROA). Return on assets measures the effectiveness of the owners or managers to generate net income from its assets. As a manager of a large corporation I would target other ratios that small business owners do not consider. The earnings per share (EPS) is an important ratio due to…
3 pages (753 words)
Assignment: Understanding the Concepts
Solvency ratios help small business owners to determine ability of their business to pay long term liabilities (New South Wales Government, 2012). Debt ratios help compare the total liabilities to the total assets. Debt Ratio= Total Liabilities ? Total Assets For example if total liabilities=$150, 000, while total assets=$300,000 Therefore, Debt ratio=150,000? $300,000= 0.5 On the other hand, profitability ratios help small business owners to determine ability of their business to generate earnings based on the expenses incurred (New South Wales Government, 2012). Some of the profitability…
4 pages (1004 words)
Understanding the concepts
The ideal ratio is 2:1. Inventory turnover ratio = cost of goods sold/ average inventory. It will be compared between firms to check the efficiency in inventory management. High inventory turnover ratio indicates sound inventory management. Return on capital employed = (profit before interest and tax/average capital employed)*100. It will be compared to check how much return the firms are earning in respect of the gross resources been deployed in the firm (Bull, 2007). 2. Explain the advantages and disadvantages of debt financing and why an organization would choose to issue stocks rather than…
4 pages (1004 words)
Understanding Concepts: Important financial ratios to a business
Understanding Concepts: Important financial ratios to a business …
4 pages (1004 words)
Assignment: Understanding the Concepts
It is of great significance that the ratios must be benchmarked against a standard in order for them to possess a meaning. Keeping that into account, the comparison is usually conducted between companies portraying same business and financial risks, between industries and between different time periods of the same company. The financial performance of the company over the last five years has been conducted in order to draw attention to various financial trends and significant changes over the period. The analysis is divided into three main categorize namely Profitability, Liquidity and…