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.
Assignments will not be accepted if this section not completed. The difference in the values obtained between current and past year is interpreted. Financial Analysis Ratios 1. The ratios are: The higher the ratio, represents the high financial risk of a company.
Total Liabilities TL 7. This ratio is used to identify the economic status of a company. Gross Profit Margin projects the business profit gained by the organisation by effective selling of its suite of offerings. It is very evident from the calculation that the value of The appreciation of 2. Current Ratio interprets whether an organization is capable to withstand the current liabilities with its current assets. The optimal value for this ratio is 1 or more.
The current ratio has increased from 1. The value 2.
Quick Ratio interprets the short term liquidity of the company more precisely than current ratio. Though the inventory values increased 1. Though inventories is deducted from current assets, the value 1. In comparison to values of In comparison to the capitalization ratio value of 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:. 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:. Return on equity is the bottom line measure for the shareholders, measuring the profits earned for each dollar invested in the firm's stock. Return on equity is defined as follows:. Dividend policy ratios provide insight into the dividend policy of the firm and the prospects for future growth.
Two commonly used ratios are the dividend yield and payout ratio. A high dividend yield does not necessarily translate into a high future rate of return.
It is important to consider the prospects for continuing and increasing the dividend in the future. The dividend payout ratio is helpful in this regard, and is defined as follows:.
A reference point is needed. To to be meaningful, most ratios must be compared to historical values of the same firm, the firm's forecasts, or ratios of similar firms.
Most ratios by themselves are not highly meaningful.
They should be viewed as indicators, with several of them combined to paint a picture of the firm's situation. Year-end values may not be representative. Certain account balances that are used to calculate ratios may increase or decrease at the end of the accounting period because of seasonal factors.
Such changes may distort the value of the ratio.
Average values should be used when they are available. Ratios are subject to the limitations of accounting methods. Different accounting choices may result in significantly different ratio values.
All rights reserved. The following types of ratios frequently are used: Liquidity ratios Asset turnover ratios Financial leverage ratios Profitability ratios Dividend policy ratios Liquidity Ratios Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. The current ratio is the ratio of current assets to current liabilities: Search NetMBA.