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

Only on StudentShare

Extract of sample
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. ...
Download paper

Summary

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. …
Author : arlene90

Related Essays

Financial Ratios. Jardine Cycle and Carriage
SWOT Analysis from Financial Perspective 13 5. Conclusion and Recommendation 14 6. References 16 16 7. Appendices 21 7.1 Appendix 1: Profit and Loss Account of Jardine Cycle & Carriage Ltd. (2010, 2009, 2008, 2007) 21 7.2 Appendix 2: Balance Sheet of Jardine Cycle & Carriage Ltd. (2010, 2009, 2008, 2007) 24 7.3 Summary/Workings for Financial Ratios 27 1. Introduction 1.1 Financial Health of the Company Jardine Cycle and Carriage Limited is an investment bearing company. The company is engaged in the processes of manufacturing, assembling, distributing and selling through retail chains various...
14 pages (3514 words) Research Paper
Financial ratios and their implications along with their usage
This essay discusses that financial ratios have been used by firms around the world to analyse how one firm performs in comparison to the other firm as well as to analyse the performance of the firm over the period of years. 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. 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...
7 pages (1757 words) Literature review
Financial Ratios Essay
The financial statement prepared with the help of financial ratios is an aid to find out the efficient operation of the business for the share holders, competitors, and outsiders who are willing to invest in the firm. These ratios play a key role in calculating the dividend to shareholders, interest to debenture holders, as well as the tax payable to government. They also express the risk factor and bankruptcy chances of the firm. Theory of Financial Ratios There have been no convincing theories on financial ratios over the years. Horrigan (1965), writes on how the financial ratios were...
6 pages (1506 words) Essay
Use of Financial Ratios
The paper is an attempt to analyze the accuracy of the statement of Lev and Sunder using some evidences taken from real world, especially by doing the cross sectional analysis of financial ratios. Use of Financial Ratios Financial ratios are used to measure a company’s financial condition or to analyze between two companies’ financial condition. All the stakeholders of the company have interest in company’s future, that is how the company would perform in the short term or long term future, how much it is secure to invest in the company, what type of change should be introduce so that...
4 pages (1004 words) Essay
Understanding the Concepts
Understanding the Concepts ...
4 pages (1004 words) Assignment
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) Essay
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) Essay
Got a tricky question? Receive an answer from students like you! Try us!