Financial ratios, a reading prepared by Pamela Peterson Drake. 1 financial ratio analysis we select the relevant information -- primarily the financial statement. 3. RATIO ANALYSIS. Objectives: After reading this chapter, the students will be able to. 1. Construct simple financial statements of a firm. 2. Use ratio analysis in . a) Current Ratio. The current ratio is a popular financial ratio used to test a company's liquidity .. cycle in any analysis of a company's working capital position.
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financial analysis, you will need to know how to use common-sized financial statements, financial ratios, and the Du Pont ratio method. In addition, you will learn. 𝗣𝗗𝗙 | In this paper, we demonstrate the use of actual financial data for financial ratio analysis. We construct a financial and industry analysis for Motorola. PDF | In today's financial world, financial performance is a requirements amongst the perspective of various stakeholders, be it in the.
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Operating Efficiency Ratios
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View access options below. They are of particular interest to those extending short-term credit to the firm. Two frequently-used liquidity ratios are the current ratio or working capital ratio and the quick ratio. Short-term creditors prefer a high current ratio since it reduces their risk.
Shareholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business. Typical values for the current ratio vary by firm and industry.
For example, firms in cyclical industries may maintain a higher current ratio in order to remain solvent during downturns.
The Analysis and Use of Financial Ratios: A Review Article
One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values. The quick ratio is an alternative measure of liquidity that does not include inventory in the current assets. The quick ratio is defined as follows:. The current assets used in the quick ratio are cash, accounts receivable, and notes receivable.
These assets essentially are current assets less inventory. The quick ratio often is referred to as the acid test. Finally, the cash ratio is the most conservative liquidity ratio.
Between the numbers
It excludes all current assets except the most liquid: The cash ratio is defined as follows:. The cash ratio is an indication of the firm's ability to pay off its current liabilities if for some reason immediate payment were demanded. Asset turnover ratios indicate of how efficiently the firm utilizes its assets.
They sometimes are referred to as efficiency ratios, asset utilization ratios, or asset management ratios. Two commonly used asset turnover ratios are receivables turnover and inventory turnover.
Receivables turnover is an indication of how quickly the firm collects its accounts receivables and is defined as follows:. The receivables turnover often is reported in terms of the number of days that credit sales remain in accounts receivable before they are collected.
This number is known as the collection period. It is the accounts receivable balance divided by the average daily credit sales, calculated as follows:. Another major asset turnover ratio is inventory turnover.
It is the cost of goods sold in a time period divided by the average inventory level during that period:. The inventory turnover often is reported as the inventory period , which is the number of days worth of inventory on hand, calculated by dividing the inventory by the average daily cost of goods sold:. Financial leverage ratios provide an indication of the long-term solvency of the firm. Unlike liquidity ratios that are concerned with short-term assets and liabilities, financial leverage ratios measure the extent to which the firm is using long term debt.
Debt ratios depend on the classification of long-term leases and on the classification of some items as long-term debt or equity. The times interest earned ratio indicates how well the firm's earnings can cover the interest payments on its debt.
This ratio also is known as the interest coverage and is calculated as follows:.
Ratio analysis pdf
Profitability ratios offer several different measures of the success of the firm at generating profits. The gross profit margin is a measure of the gross profit earned on sales. The gross profit margin considers the firm's cost of goods sold, but does not include other costs. It is defined as follows:.
Return on assets is a measure of how effectively the firm's assets are being used to generate profits. It is defined as:.Cash comprises both currency—bills and coins—and assets that are immediately transformable into cash, such as deposits in bank accounts.
Ratios are only means of financial analysis and not an end in itself. Then both came to India in to assess the value of various cement-manufacturing groups on behalf of F. Book value, in simple terms, is the amount that will remain if the company liquidates its assets and repays all its liabilities.
Their use as tools of financial analysis involves their comparison as single ratios, like absolute figures, are not of much use.
A high ratio will indicate high financial strength but a very high ratio will indicate that the firm is not using external funds adequately.
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