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Understanding Concepts: Important financial ratios to a business - Essay Example

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Finance & Accounting
Pages 4 (1004 words)


Systematic risk results from risk factors that have effect on the entire market. Such factors include change in parameters of socio-economic, shift in taxation clauses, foreign investment policy, changes in investment policy, threats of global measures and security among others. …

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Understanding Concepts: Important financial ratios to a business

Understanding Concepts: Important financial ratios to a business

Ratio Analysis helps the business manager to see trends in a business, and compare its condition and performance with that of like businesses in a similar industry. Ratios important to a manager of a large corporation include return on investment (ROI), return on assets, (ROA), and debt-to-equity. Balance Sheet Ratio Analysis calculates solvency and liquidity of a business. They include Current Ratios = Total Current Assets / Total Current Liabilities. The ratio shows whether a business has sufficient current assets to meet its current debts and leave a margin of safety in case of current assets losses such as collectable accounts or inventory shrinkage. Two to 1 is the favourable current ratio (Stickney, 2010). If the current ratio of a business is low, turning fixed assets into current assets, debts payment, and taking back profits into the business can help raise it. Quick Ratios / acid-test ratio = Cash + Government Securities + Receivables / Total Current Liabilities. 1:1 is the satisfactory acid-test ratio. Working Capital is calculated by taking Total Current Assets less Total Current Liabilities. Leverage Ratio or Debt/Worth Ratio = Total Liabilities / Net Worth. It indicates how far a business relies on debt financing. If this ratio is high, it becomes hard to obtain credit. Income Statement Ratio Analysis measures profitability. They include Gross Margin Ratio = Gross Profit / Net Sales. ...
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