Paper Example on Financial Ratios

Published: 2021-06-30
512 words
2 pages
5 min to read
Wesleyan University
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Course work
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A company uses certain computations to gauge the financial status of the company. As such, investors are on the look out to those computations since they have to analyze whether their investment is gaining or losing. A company uses financial ratios that are divided into five categories:

Liquidity Ratios

The ratio is important in that a company can be able to know whether it can be able to pay its debt obligations within the short-term. In essence, the analysts concentrate on current assets and current liabilities since they can correctly predict their current status. There are different liquidity ratios used in the study. The most common are the quick ratio and the current ratio.

Debt Ratio

The debt ratios are used to measure the companys ability to pay the debt within the long-term. The focus is therefore on the liabilities section of the balance sheet. The most common debt ratios used are the cash coverage ratio, the debt/equity ratio, the long-term debt ratio, and the total debt ratio.

Asset Efficiency

The turnover ratio or asset efficiency measures the firms efficiency in their use of assets to create more sales. Subsequently, the ratio concentrates on both the balance sheet of the company as well as the income statement. The most widely recognized asset proficiency ratios are the working capital ratio, inventory turnover ratio, the days sales in receivable ratios, the fixed asset turnover ratios, the receivables turnover ratios, and the total asset turnover ratio

Profitability Ratios

The profitability proportions are exactly what the name suggests. They concentrate on the company's capacity to create profit and a sufficient return on asset and equity. They measure how productively the firm uses its assets and how it handles it companys operations. There are different examples used as profitability ratios. Some examples are returning on equity, return on assets, and profit margin. A few cases of gainfulness proportions are overall revenue, return on assets (ROA) and profit for value (ROE).

Market Value Ratios

The market value ratios can be computed for companies that have publicly sold their shares to the public. There are many market value ratios used; for instance, dividend yield, book value to share value, and price/earnings (P/E).

As a financial analyst, certain financial ratios are to be used in the financial analysis. The ratios to be used in the analysis are the return on equity, quick ratio and the debt-equity ratio. Return on equity is important in that it enables investors to know whether their investments can pay much earlier. The quick ratio, as well as debt-equity ratio, is important in that it will enable the company to know whether it can pay their debt obligations.

The book value is the original purchase cost after it is adjusted for depreciation while the market value is the price of selling an asset on a competitive basis.

The DuPont Identity is essential since it helps the analyst comprehend what is driving an organization's ROE; profit margin is used to gauge the operating efficiency; while the financial leverage indicates how much a firm depends on debt to increase profitability


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