Financial Ratios - Essay Example

Only on StudentShare

Extract of sample
Financial Ratios

In addition, you can use these ratios to compare the performance of your company against that of your competitors or other members of your industry. (Alex Auerbach)
When you take profit before tax or interest (EBIT) and divide it by the difference between total assets and current liabilities, you can get a financial ratio known as return on capital employed ratio or ROCE. It is a ratio that shows the company's capital investments' profitability and efficiency. The ROCE ratio is a measure of how well a company is using capital to generate income. A high ROCE is a sign or a successful growth company and indicates that a larger mass of proceeds can be reinvested to gain more profit. However; one year ROCE evaluation should not be the basis for reinvesting. Investors should look closely on the trend over several years to have consistency. A sudden decline in ROCE signals a loss of competitive advantage.
Asset Turnover Ratio specifies the connection between assets and revenue (Revenue/Total assets). It gauges a company's efficiency in using its resources in making sales. A higher asset Turnover is better. It also specifies pricing strategy: companies with low profit margins are inclined to have high asset turnover, whereas those with high profit margins tend to have low asset turnover. ...
Download paper


One of the time-tested methods in analyzing a business is the use of financial ratios. Big firms and businesses make use of financial ratio analysis to know more about a company's potential and current financial health. Specifically, financial ratios can be used in two different but equally useful ways:
Author : freddy87

Related Essays

Financial Resources Mgt Assignment
Financial ratios are helpful in finding the performance of the company immediately. It uses key figures from the financial statements and analyses by comparing the results of the ratios to the ratios of a successful business corporation....
9 pages (2259 words) Essay
Inadequacies of accounting ratios as tools of financial analysis
The multi-discriminant analysis and methodologies involving ratio disaggregation or decomposition such as DuPont analysis are commonly used as well for the purpose of financial analysis....
3 pages (753 words) Essay
Commentary on Accounting Ratios
This means newer businesses will generally have lower ROCE as compared to older businesses due to the depreciated amount of its assets. Additionally, the number of years that both Dairy Crest and its close competitor have been in business is unclear. The revenue of Dairy Crest is up by almost 20% in 2008, resulting in Operating Profit Margin of 6%. This result is on par with its competitor. However, the improvement may have been attributed by the twofold increase in Dairy Crest's other income, of which the breakdown has not been disclosed. Given the equal result, it can be said that the...
4 pages (1004 words) Research Paper
Financial Ratios Discussion
The business may also have seasonal nature....
3 pages (753 words) Essay
Understanding and interpreting financial data
The vast competition and globalization that businesses face today means necessary steps to ensure continuous growth must be put in place. One method of doing this is the analysis of financial ratios. In this case, Bravo Ltd can obtain financial ratios using their latest financial statements and comparing the results with a competing business within the same industry. Alternatively, a business with the best business practice and a good track record is chosen as a benchmark for Bravo Ltd's improvement.It is a tool for interpreting the financial statements to assess financial and management...
4 pages (1004 words) Coursework
financial ratios
There are different ways in which financial ratios can be improved by the firm and hence its performance. However, it is critical to note that financial ratios can also be improved with the help of creative accounting techniques such as use of different depreciation methods, inventory value methods etc....
2 pages (502 words) Essay
The higher the level of gearing, the higher would be the return required from the loan provider/bank as they would be exposed to greater risk and the susceptibility that their money might go unpaid if the company goes bankrupt (Vandyck, 2006)....
1 pages (251 words) Essay
Got a tricky question? Receive an answer from students like you! Try us!