Analyzing a firm’s financial position is essential for those in charge to make t
ID: 2612880 • Letter: A
Question
Analyzing a firm’s financial position is essential for those in charge to make their plans as you have mentioned. They are also used by investors to learn whether the business is operating in a healthy manner or not and can hence make decisions on their investments You have, however, not mentioned the financial the ratios that a firm would need to use and how they would need to use them. It is not clear how the ratios can work to the advantage of the firm or against the firm. You have also not derived how these ratios can be used by different stakeholders to evaluate the business fairly and hence make sound decisions concerning the firm.I need a response please! Analyzing a firm’s financial position is essential for those in charge to make their plans as you have mentioned. They are also used by investors to learn whether the business is operating in a healthy manner or not and can hence make decisions on their investments You have, however, not mentioned the financial the ratios that a firm would need to use and how they would need to use them. It is not clear how the ratios can work to the advantage of the firm or against the firm. You have also not derived how these ratios can be used by different stakeholders to evaluate the business fairly and hence make sound decisions concerning the firm.
I need a response please!
I need a response please!
Explanation / Answer
Answer:
Below are few important ratio's:
Liquidity Ratio:
Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations.
Current Ratio = Current asset/current liablities
Quick Ratio = (Current Assets - Inventory)/current liablities
Cash Ratio = (Cash + Marketable Securities)/Current Liabilities
On one side high current ratio is preferred by short-term creditors since it reduces their risk on the other side shareholders prefer a lower current ratio fot the reason being that more of the firm's assets are used optimally.
Cash ratio = Signifies firms ability to quickly payoff its current liablities if urgently demanded.
Asset Turnover Ratios:
Asset turnover ratios indicate the efficiency with which the firm's assets are utilized in it's business.
Receivable turnover signifies how well the firm is collecting its credit sales or is it inefficient in collecting resulting in unutilization of firms resourses to its advantage.
Receivables Turnover = Annual Credit Sales/Account receivable
Average Collection Period = Accounts Receivable/(Annual Credit Sales / 365)
The inventory turnover is the number of time inventories has been mobilized and not kept in excess compared to peer's in industry.
Inventory Turnover = Cost of Goods Sold/Average Inventory
Financial Leverage Ratios:
Financial leverage ratios provide an indication of the long-term solvency of the firm.
Debt Ratio = Total Debt/Total asset
Debt-to-Equity Ratio = Total Debt/Total equity
The times interest earned ratio indicates the ability of firm to pay its interest due. So it is calculated by no of time that the earnings can cover the interest payments on its debt. It is ususally derived by the lender yo business to determine firms solvency and strength of financials.
Interest Coverage = EBIT/Interest Charge
Profitabiity ratios:
Return on asset:
Return on assets is a measure of how effectively the firm's assets are being used in its business to generate profits.
Return on Assets = Net Income/Total Asset
Return on equity is the measure for the equity holder, measuring the return earned for each dollar invested in the firm's stock.
ROE = Net income/Shareholder's Equity