How to Interpret Financial Analysis Ratios
It is essential to carry out analytical evaluations of a business and contrasting of financial figures when accessing a business contracts. There are various categories of rations that will enable one to access the status of a business in various aspects.
Instructions
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These are called Liquidity Ratios analyze and reflect company's ability to meet its debt obligations when they become due.
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To understand the basis of the liquidity ratios used; it is important to analyze the type of data used which includes:
• Comparing the company assets that can be easily turned into cash (i.e. liquid assets) in order to meet the maturing debt at that period.
• Accessing the promptness with which the liquid assets are actually concerted into cash.
These include: Current Ratio, Acid test /Quick Ratio, Current cash debt coverage ratio, Receivables turnover, Inventory Turnover Ratio, Net Working Capital Ratio and Current Liabilities to Inventory Ratio -
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Profitability Ratios are used to determine if adequate profits are being generated in contrast to the investments planted into the corporation.
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The profitability ratios are accessed when:
• The various forms of profits are contrasted to the assets invested.
• The forms of profit contrasted may include:
-Gross profit measure profitably before taking into account marketing related expenses
-Net profit is deduced are taking into account tertiary expenses such as interest etc.
-Operating profits which are the actual profit generated directly from company productivity which is ideal for assessing profit return on investment.
These include: Profit Margin Ratio, Cash return on sales Ratio, Asset Turnover Ratio etc. -
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Solvency ratios are used to determine the resources or means the company is using to finance its assets and activities. The objective is to monitor the debts and assets ratio.
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To access the solvency ratios contrast;
-The proportion of the company's total debt to the total company assets to ascertain the debt equity ratio.
-The operating Income to interest expense to access the firm's debt servicing capacity.
These include: Debt/Equity Ratio, Cash debt coverage Ratio, Debt to Total Assets Ratio, Times interest Earned. -
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The Return on Equity Ratios accesses how much the shareholder receive in contrast to their equity contributions to the company i.e. Shareholder's investments.
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The various types of shareholders equity and earnings are contrasted against the profit various forms of profits mentions in
STEP 4. These include: Stockholder's equity Ratio, Rate of Return on common stock, Earnings per Share Ratio, Price-earnings ratio etc.
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