Financial Ratios

In: Business and Management

Submitted By janaelle
Words 448
Pages 2
Financial Ratios
Julian Rodriguez
November 15, 2012
Dr. Yvan Nezerwe

Financial ratios are very helpful to everyone from business manages to individuals. For example, managers use financial ratios to monitor inventory, help make decisions on what products a company should produce. They also help to determine if a person will be approved for a loan.
There are many financial ratios used in financial management these ratios include liquidity ratios, capital structure ratios, asset management efficiency ratios, profitability ratios, and market values ratios. A liquidity ratio tells how well a company is doing by determining if a company is paying its bills on time. Capital ratio is the way a business finances its assets using a debt and equity. Asset management efficiency ratio is used to keep track of how well a company is performing. A profitability ratio is used to monitor if a firm has earned a positive percentage in returns on investments. Market value ratios are used to find the value of firm’s shares in the stock market.
Since we have discussed the different financial ratio we will determine the limitations involved with financial ratios. Ratios are an effective way of pinpointing firm’s financial performances and how effective management is doing but ratios should not be used blindly. A financial ration should not be used as a manager’s only source in a manager’s tool kit. For example a financial ratio can figure out the strong and weak points of a business, but the ratio cannot determine why things are going wrong and cannot find a way out of a particular situation. To overcome this type of situation before committing to a certain ratio a manager should set up some type of operational risk management train for the unexpected set up scenarios for different emergency situations for in case things go wrong. Another form a…...

Similar Documents

Financial Ratio

...Financial Ratios & Other Financial Analysis Tools Here is a list of many ratios used to analyze a company's financial condition - along with an explanation of why they are considered to be important.  Liquidity Ratios * Current Ratio * Acid Test Ratio * Average Collection Period Coverage Ratios * Times Interest Earned * Net Income + Non-cash Exp /  Current Portion of LT Debt Leverage Ratios * Fixed Assets / Tangible Net Worth * Debt to Tangible Net Worth | Operating Ratios and Indicators * Gross Profit Margin * EBT / Tangible Net Worth * EBT / Total Assets * Fixed Asset Turnover Ratio * Total Asset Turnover Ratio * E.B.I.T.D.A. ("Ebitda") Expense to Revenue Ratios * % Depreciation, Depletion & Amortization / Revenue * Officers' &/or Owner's Compensation / Revenue Ratio Fusion! * Altman's Z-Score for Privately Held Firms | Banks often use ratios in loan contracts with benchmarked minimums or maximums (aka 'Covenants').  Even if covenants are not listed in your loan contract, banks still look at them.  You will add credibility to your financial statements if you include financial ratios and indicators in your presentation to the bank. They will think you use these indicators internally, and they'll love you for it!  Actually; If you're not using Financial Analysis Tools and Benchmarks internally, you should strongly consider it.  LIQUIDITY RATIOS Liquidity ratios......

Words: 1442 - Pages: 6

Financial Ratios

...The use of Financial Ratios Vickie M. Adams AIU Online HLTH420-1302A-02 Instructor: Dr. Christopher Miller Unit 5 IP Abstract This paper will discuss the various types of formulas used by organizations in order to determine whether a project is financial suited to meet the needs of the company. There are several different formulas and ratios to use to determine which project to approve or reject. This paper will discuss three formulas/ratios and its affect to the on the payer mix for the organization. The use of Financial Ratios The Net Present Value (NPV) is the present value,(which is the value today of a stream of payments and/or receipts over time in the future and/or past, converted to the present using an interest rate), of an investment's future net cash flows (a measure of the company’s financial health) minus the initial investment ( If positive, the investment should be made (unless an even better investment exists), otherwise it should not. An individual or a company should conduct a project or make an investment if the internal rate of return exceeds the discount rate. So there should only be participation in any investment if the discount value of the cash inflows will exceed cash outflows ( If this is the case then the project should be accepted if the internal rate of return is higher that the discount rate and thus rejected it is lower than the discount rate. Profitability index is the ratio of the......

Words: 998 - Pages: 4

Financial Ratios

...Financial Ratios Financial ratios are essential tools for fundamental analysis, which determines the value of a company using both qualitative and quantitative methods. Companies collect numerical data such as sales and inventory every day; the calculation of financial ratios allows the company, its investors, and banks to see through the masses of data and estimate the company's intrinsic value (Loth, 2012). Types of financial ratios include liquidity ratios, profitability indicator ratios, debt ratios, and operating performance ratios, among others (Drake, n.d.). The cash conversion cycle (CCC) ratio is a liquidity ratio that is less common than some other liquidity calculations, but in many cases it is more useful because it takes into account how long a full cycle requires -- how long it takes for the company to sell inventory, receive payment, and pay its own creditors (Loth, 2012). The cycle is a dynamic liquidity indicator rather than a static one like the more common current and quick ratios (Lancaster & Stevens, 2011). The CCC ratio evaluates the company's use of working capital, and is computed using the Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO), which are found in the company's current accounts (Loth, 2012). The following formula is used: CCC = DIO + DSO - DPO. A larger CCC means that the cycle is longer and therefore less liquid, potentially increasing the need to borrow. However, this is a......

Words: 1037 - Pages: 5

Ratio and Financial Ratio Analyisis

...Ratio and Financial Statements Analysis Kimberly Y. Gruber University of Maryland University College Dr. Sunando Sengupta 07/25/2013 Turnitin Score: 23% Executive Summary The purpose of this paper is to examine ratio and financial statement analysis. Such analysis is a useful tool for managers and stakeholders to evaluate a company’s financial health in order to identify opportunities for growth and areas of weakness so as to institute corrective measures.  Financial statements are used in order to predict trends of cash flow within the business as well as predict the potential of a business and if they are capable of financial growth. Ratio analysis examines the probability of a company’s profit or a company’s loss. This paper will examine the benefits and limitations of ratio analysis, explain what factors impact the meaningfulness of such measures and what new practices or theories may be emerging regarding the application of ratio and financial statement. The paper concludes that ratio and financial statements is an essential tool used in analyzing a company’s profit. Introduction to Ratio and Financial Statement Analysis Though there are various methods for monitoring the liquidity of businesses the most common has been the use of financial ratios. Ratio analysis is an established technique—involving the relationship between two or more variables--that is used to conduct qualitative analysis of information contained in a company’s financial statement......

Words: 1722 - Pages: 7

Financial Ratio

...ISOM 249 Functions and Purposes of Financial Ratios I. Functions of Financial Ratios Financial ratios can be used to show a company’s: • Position in its industry (industry comparisons) • Accomplishment of objectives (objective comparisons) • Vulnerability in the economy (time-series/trend analysis) • Future borrowing power and growth potential (leverage ratios) • Ability to react to unforeseen external changes (price/earnings ratio) II. Types of Ratios and Their Purposes • Profitability ratios indicate how well a company allocates its resources in relation to income generated. • Liquidity ratios measure whether a company is able to pay its bills. • Leverage ratios show how a company’s operations are financed. • Activity ratios measure a company’s productivity and efficiency. • Price/earnings (P/E) ratio reflects investors’ estimations of how well the company will be able to cope with unforeseen changes. III. Absolute Standards for Business Performance In many organizations, minimum financial ratios are used to serve as absolute standards for their performance as follows: • Profitability: net profit no less than 3% • Liquidity: current ratio greater than one • Leverage: long-term debt to total equity less than one • Activity: average collection period less than 60 days IV....

Words: 1937 - Pages: 8

Financial Ratio

...Financial Ratio Analysis It is difficult to infer organizational performance from one or two simple numbers.  Nevertheless, in practice a number of different ratios are often calculated in strategic planning endeavors and, taken as a whole and with some caution, these ratios do provide some information about the relative performance of an organization.  In particular, a careful analysis of a combination of these ratios may help you to distinguish between firms that will eventually fail and those that will continue to survive.  Evidence suggests that, as early as five years before a firm fails, one may be able to detect trouble from the value of these financial ratios.1             In this note, the basic financial ratios are reviewed, and some of the caveats associated with using them are highlighted.  The ratios tend to be most meaningful when they are used to compare organizations within the same broad industry, or when they are used to make inferences about changes in a particular organization's structure over time. LIQUIDITY RATIOS In order to survive, firms must be able to meet their short-term obligations—pay their creditors and repay their short-term debts.  Thus, the liquidity of the firm is one measure of a firm's financial health.  Two measures of liquidity are in common: Current ratio = current assets / current liabilities   Quick ratio  = (cash + marketable securities + net receivables) / current liabilities             The main difference between the......

Words: 1929 - Pages: 8

Financial Ratio

...Evaluation & Alternatives ---------------------- According to the chapter of financial ratio, the Operating Profit Margin, Net Profit Margin and Return on assets and equity had downward trend since 2008, will drop to its record low in 2013, then upward trend afterwards. However, the Gross profit Margin will be kept as same as that before expansion. Moreover, Efficiency of Cash Management will be done better on rise of Creditor Ratio despite Debtor Ratio will go up. This can be improved by adjustment of period in accounts receivable during 2013-17. Furthermore, the Liquid Ratio and Current Ratio will steady grow stating higher realization ability of corporate assets after expansion. What’s more, the D/E Ratio and Basic Earnings per Common Share will boom. Despite, the productivity will not be looking good. The Inventory Turnover will fall to 2.5 which is 19.61% lower than average value in 2008-12. The Total Asset Turnover will decrease its lower level while the Average Collection Period will reach to the higher level. And the Debt ratio will maintain in risky level. Don’t forget, extra 400 stores & £100M-worth-new equips and stocks will be bought. When look into the balance sheet, there are negative cash £21,493.24 and £6,406.51 in year 2013 and 2014 respectively. The extra £279 million needed to maintain healthy capital structure. The alternatives are as follows. 1. Right issue - Issue of rights to buy additional securities in a company made to the company's......

Words: 333 - Pages: 2

Financial Ratios

...Finland The Review of the Theoretical and Empirical Basis of Financial Ratio Analysis Revisited With the Modern Developments in the Web-Based Publishing Abstract This web-based publication is an addendum to a previous review of the research and research trends in financial ratio analysis. The first purpose is to add more current references to the previous review. The second purpose is to emphasize the changes facilitated by the modern World Wide Web based publication practices and their impact on the availability of scientific publications. The new references are listed only without detailed reviewing, since no drastic additions have come to the fore in the field. However, it is felt that the additions are sufficient to warrant this addendum made readily possible by the option of making this publication available online.   Keywords: Financial statement analysis, financial ratios, review, electronic publishing   Referencing: Salmi, Timo, Jussi Nikkinen & Petri Sahlström (2005). The Review of the Theoretical and Empirical Basis of Financial Ratio Analysis Revisited. University of Vaasa, Finland. URN:NBN:fi-fe20051937. Available from World Wide Web: <URL:>.   Acknowledgements for useful discussions: Prof. Ilkka Virtanen and Library Managing Director Vuokko Palonen. Purpose Salmi and Martikainen (1994)  presented a review of the theoretical and empirical basis of financial ratio analysis. In particular, the review sought to answer......

Words: 5464 - Pages: 22

Financial Ratio

...A STUDY ON FINANCIAL RATIOS OF MAJOR COMMERCIAL BANKS Dr. Y. Sree Rama Murthy Director Research & Senior Faculty Member College of Banking & Financial Studies Sultanate of Oman RESEARCH STUDIES 2003 _______________________________________________________ College of Banking & Financial Studies PO Box 3122, PC 112 Sultanate of Oman CONTENTS Chapter 1 INTRODUCTION Chapter 2 PROFITABILITY MANAGEMENT RATIOS Chapter 3 LIQUIDITY RISK MANAGEMENT Chapter 4 INTEREST RATE RISK MANAGEMENT Chapter 5 CAPITAL ACCOUNT MANAGEMENT Chapter 6 CREDIT RISK MANAGEMENT Chapter 7 COST MANAGEMENT Chapter 8 INTERNATIONAL COMPARISONS Chapter 9 CONCLUSIONS REFERENCES Summary The objective of the study is to calculate the important financial ratios of major commercial banks in Oman and compare their financial management practices as indicated by the ratios. The study also compares ratios of commercial banks in Oman with ratios of other banks in developed countries so that it throws up not only intra country performance comparisons but also cross country comparisons which makes study all the more useful. For the purpose of the study data was drawn from the balance sheets and income statements of commercial banks. The study uses data from December 1997 to December 2004 for the profitability ratios part of the study. For studying liquidity, interest rate risk, capital adequacy etc the study uses the data from December 2000 to 2004...

Words: 12048 - Pages: 49

Financial Ratios

...Handout 6 Analyzing Your Financial Ratios Taken from Overview Any successful business owner is constantly evaluating the performance of his or her company, comparing it with the company's historical figures, with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of your company's effectiveness, however, you need to look at more than just easily attainable numbers like sales, profits, and total assets. You must be able to read between the lines of your financial statements and make the seemingly inconsequential numbers accessible and comprehensible. This massive data overload could seem staggering. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify and quantify your company's strengths and weaknesses, evaluate its financial position, and understand the risks you may be taking. As with any other form of analysis, comparative ratio techniques aren't definitive and their results shouldn't be viewed as gospel. Many off-the-balance-sheet factors can play a role in the success or failure of a company. But, when used in concert with various other business evaluation processes, comparative ratios are invaluable. This discussion contains descriptions and examples of the eight major types of ratios used in financial analysis: Income,......

Words: 3901 - Pages: 16

Financial Ratios

...RSM1320 – Financial Accounting FINANCIAL ANALYSIS TECHNIQUES (RATIO ANALYSIS) KEY POINTS TO KNOW 1) Financial analysis is ultimately contextual and purpose-driven. In other words, there is always a reason why you are performing the analysis. You need to be clear about the objective of the analysis. 2) The tools and techniques that you use will depend on your purpose. As we discussed earlier, analyzing the company as an investment opportunity (which generally focuses on indicators of profitability of growth) is often different from analyzing the company from the perspective of a credit (lend or not) decision (which generally focuses on indicators of risk, liquidity, and solvency). 3) Financial analysis will seldom provide an “answer” to your objective or starting question (e.g. invest or not, lend or not). The usefulness of financial analysis is to provide valuable insights and additional questions to ask in arriving at a particular decision. Each individual ratio is a basic “indicator”, but it does not by itself provide an explanation of “why” something happened. To get the most value out of financial analysis, you need to understand how these ratios relate to one another and to the business model (and industry) of the company you are analyzing. This requires experience. 4) There is no single authoritative source providing rules about how particular ratios are calculated. While there are standards of practice (that we will follow), there is also significant...

Words: 1398 - Pages: 6

Financial Ratio

...01 technical the use of comparisons in In the Paper F8 exam you may be asked to compute and interpret the key ratios used in analytical procedures at both the audit planning stage and when collecting audit evidence. RELEVANT to ACCA QUAlification paper F8 In the Paper F8 exam you may be asked to compute and interpret the key ratios used in analytical procedures at both the audit planning stage and when collecting audit evidence. Ratios and comparisons can be used to identify where the accounts might be wrong, and where additional auditing effort should be spent. Calculating a ratio is easy, and usually is little more than dividing one number by another. Indeed, the calculations are so basic that they can be programmed into a spreadsheet. The real skill comes in interpreting the results and using that information to carry out a better audit. Saying that a ratio has increased because the top line in the calculation has increased (or the bottom line decreased) is rather pointless: this is simply translating the calculation into words. Use the mnemonic RATIO to remind yourself to keep asking the following questions: ¤ Reason – why has this change occurred? ¤ Accident – is the change real or simply an accident of timing? ¤ Test – what can be done to test our conclusions? What other work should we do? ¤ Implications – what does this change mean? Liquidity crisis? Poor management etc? ¤ Other information – is this consistent......

Words: 3160 - Pages: 13

Financial Ratios

...Profitability ratios Profitability ratios measure the company's use of its assets and control of its expenses to generate an acceptable rate of return Gross profit margin or Gross Profit Rate OR Operating Income Margin, Operating profit margin or Return on sales (ROS) Note: Operating income is the difference between operating revenues and operating expenses, but it is also sometimes used as a synonym for EBIT and operating profit.[10] This is true if the firm has no non-operating income. (Earnings before interest and taxes / Sales[11][12]) Profit margin, net margin or net profit margin[13] Return on equity (ROE)[13] Return on investment (ROI ratio or Du Pont Ratio)[6] Return on assets (ROA)[14] Return on assets Du Pont (ROA Du Pont)[15] Return on Equity Du Pont (ROE Du Pont) Return on net assets (RONA) Return on capital (ROC) Risk adjusted return on capital (RAROC) OR Return on capital employed (ROCE) Note: this is somewhat similar to (ROI), which calculates Net Income per Owner's Equity Cash flow return on investment (CFROI) Efficiency ratio Net gearing Basic Earnings Power Ratio[16] Liquidity ratios Liquidity ratios measure the availability of cash to pay debt. Current ratio (Working Capital Ratio)[17] Acid-test ratio (Quick ratio)[17] Cash ratio[17] Operation cash flow ratio Activity ratios (Efficiency Ratios) Activity ratios measure the effectiveness of the firms use of resources. Average collection...

Words: 442 - Pages: 2

Financial Ratios

...Grade Received - "A" Choose 4 different financial ratios from your text, course materials, and/or Web resources. Answer the following questions: What do they tell you about a firm? Why is it important for a bank to understand these financial ratios? Why is it important for an investor to understand these financial ratios? Financial ratios are important when it comes to understanding the financial health of a company. My colleagues and I work for a financial service and are discussing the merits of the various financial ratios. We are to identify for financial ratios and what they tell us about it for and why it is important for banks to understand these financial ratios as well as the importance it has for an investor to understand these financial ratios. The company that I will be discussing about is the Coca-Cola Company. I browsed through the Coca-Cola website and also the "investors" portion of a website and looked at through their financial statements in 2008. These included the income statement, balance sheet and cash flow statement for the 2006 fiscal year. When conducting the market value ratio for Coca-Cola, it turns out that the P.E. ratio is 22.02 and the market to book value is 6.61. The market value ratio is a measure of how expensive the stock is (Brooks, 2010). The higher the price earnings ratio, the more we are paying for each dollar of earnings. The higher the market to book value, the more we are paying for each dollar of equity we have on......

Words: 1069 - Pages: 5

Financial Ratios

...different financial ratios from your text, course materials, and/or Web resources. * Answer the following questions: * What do they tell you about a firm? * Why is it important for a bank to understand these financial ratios? * Why is it important for an investor to understand these financial ratios? * Post a new topic to the Discussion Board that contains your answers to the above questions Financial ratios are measurements used to analyze entities of financial performance. They are several financial ratios one can choose from, the main four are; profitability ratios, efficiency ratios, liquidity ratios and solvency ratios. Each ratio has different rules and they perform in their own ways. They are important tools that evaluate the profitability, efficiency, liquidity and solvency of an entity of the firm. Profitability ratios help users of an entity financial statements determine the overall effectiveness of management regarding returns generated on sales and investments (Manley, 2009). Normally used profitability ratios are gross profit margin, operating profit margin and net profit margin. Gross profit margin measures profitability after considering cost of goods sold, while operating profit margin measures profitability based on earnings before interest and tax expense. One margin that’s often referred to as the bottom line and takes all expenses into account is the Net profit margin (Manley, 2009). Efficiency ratios are known as the......

Words: 548 - Pages: 3

Pokemon Season 01: Indigo League | Moi, Moche et Méchant 3 CAM VF | Watch Movie