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Understanding the Concepts
Finance & Accounting
Pages 3 (753 words)
Organizations must evaluate and analyze the financial results of the firm. A quantitative technique that can be used to evaluate financial results is ratio analysis. There are five categories of ratios. The five categories of ratios are profitability, liquidity, leverage, efficiency, and market.
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 the fact that it measures the amount of income generated per common stock outstanding. A high EPS positively impacts the market value of a common stock. A second financial metric that corporations have to consider is the dividend payout ratio. The dividend payout ratio is an index showing whether a company pays out most of its earnings in dividends or reinvests the earnings internally. A third ratio I would pay close too is inventory turnover. Inventory turnover is calculated dividing cost of goods sold by average inventory balance. It measures how many times a company’s inventory has been sold during a year. Debt financing occurs when companies borrow money from other parties to finance its operations. Three types of debt financing instruments are loans, notes payables, and corporate bonds. The federal government is one of the biggest players in the debt industry. ...
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