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Finance & Accounting
Pages 3 (753 words)
Ratios and Profit Margin Insert name Course code Instructor’s name Name of the university DISCUSSION 1: RATIOS Firm’s performance can be predicted by use of financial ratios. When calculating financial ratios, information is generated from company’s financial statements.
In special cases, ratio analysis is done to help in predicting possible future bankruptcy of the company. The main financial ratios used in most cases include: Liquidity ratio, financial leverage ratio, asset turnover rations, dividend policy ratios and profitability rations. Generally, these ratios are useful indicators of a firm's performance and the prevailing financial situation. Do ratio tells the whole story? To some extents, financial ratios play an important role by providing an overview of accounting and financial position of the company. However, ratios do not give the overall picture of the organization. This is because it depends on historical figures which are bound to change due to certain seasonal factors. In the same note, ratios are highly subjected to manipulation and this affects credibility of the outcome. This implies that adjustments can be made on earnings to predict higher returns to the company. Based on this view, it means that ratios may mislead and should be treated with a lot of caution when interpreting financial position of the company. Liquidity Ratios Liquidity ratios are used to determine the ability of the firm to accomplish short term financial needs. It mainly applies to parties who extend short term credit facilities to the company. Two main liquidity ratios include: Current Ratio and Quick ratios. ...
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