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Financial Ratios
Financial ratios are important when analysing firm’s financial statements as they provide valuable insight into how a firm is operating. Financial ratios can be separated into five different categories, activity ratios, growth ratios, liquidity ratios, profitability ratios and solvency ratios. Activity ratios measure how quickly a firm converts non-cash assets into cash. Growth ratios measure investor’s response in owning shares in a particular firm. Liquidity ratios measure the availability of cash that a firm has in order to meet their short term debt obligations. Profitability ratios measure how a firm uses their assets and controls their expenses to generate an acceptable rate of return. Solvency ratios measure the firm's ability to repay long-term debt. The ratios presented in the tutorials below may differ from other textbooks and websites. The issue is that different analysts use different measures in calculating similar ratios. It is important to keep in mind that there is no one "correct" way to calculate accounting ratios. |
مشاركة: Financial Ratios
Activity Ratios Activity ratios examine the day-to-day operating efficiency of a firm. The higher the ratio the more efficient the firm is operating. Activity ratios measure how quickly a firm converts non-cash assets into cash. The following ratios are covered in this tutorial: Inventory Turnover Receivables Turnover Payables Turnover Working capital Turnover Fixed Asset Turnover Total Asset Turnover |
مشاركة: Financial Ratios
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Growth Ratios Growth ratios help analysis the growth of a firm. Firms that are growing well usually have a solid business plan in place and have a diverse range of investments. Successful firms will show high growth rates at the beginning of their life. Firms growth rates start to decline as they mature. The following ratios are covered in this tutorial: Dividend Payout Ratio Retention Ratio Sustainable Growth Ratio |
مشاركة: Financial Ratios
Liquidity Ratios Liquidity ratios access the firm’s ability to pay off their short term debt. To pay off short term debt a firm needs to be able to convert their currents assets into cash quickly. These ratios indicate a margin of safety. Liquidity ratios should be above 1 and preferably above 1.5. If the ratio is equal to or greater than 1 then the firm will likely be able to meet their short term obligations. If it happens to be below 1 then the firm is facing a liquidity problem and it is unlikely they will be able to meet there short term debt obligations. The following ratios are covered in this tutorial: Current Ratio Quick Ratio (acid test ratio) Cash Ratio Operating Cash Flow Ratio |
مشاركة: Financial Ratios
Liquidity Ratios Liquidity ratios access the firm’s ability to pay off their short term debt. To pay off short term debt a firm needs to be able to convert their currents assets into cash quickly. These ratios indicate a margin of safety. Liquidity ratios should be above 1 and preferably above 1.5. If the ratio is equal to or greater than 1 then the firm will likely be able to meet their short term obligations. If it happens to be below 1 then the firm is facing a liquidity problem and it is unlikely they will be able to meet there short term debt obligations. The following ratios are covered in this tutorial: Current Ratio Quick Ratio (acid test ratio) Cash Ratio Operating Cash Flow Ratio |
مشاركة: Financial Ratios
Profitability Ratios Profitability ratios examine how profitable a firm has been during the period. This usually involves comparing revenue earned by the firm with other aspects of the firm, such as expenses and net profit. The following ratios are covered in this tutorial: Gross profit margin Net profit margin ratio Expense ratios Return on Assets Return on Equity (ROE) EBIT Margin Ratio |
مشاركة: Financial Ratios
Solvency Ratios Solvency ratios analyses a firm’s ability to meet both their short term and long term liabilities. The inability of a firm to meet their obligations can lead a firm to default on their loans and can lead to bankruptcy. The following ratios are covered in this tutorial: Solvency Ratio Debt Ratio Debt to Equity Ratio Cash Flows from Operations to Debt Ratio Times Interest Earned Coverage Ratio |
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