Financial Ratios
Financial ratios indicate a company's financial situation and financial performance. Based on the information provided by these ratios, one may also calculate financial projections, financial trends, offering an image on the company s possible future accomplishments. Based on the results provided by these calculations, companies determine their future strategy. Financial ratios are divided into four main categories that are most frequently used: liquidity ratios, profitability ratios, leverage ratios, and efficiency, activity, and turnover ratios. The following pages will focus on discussing four financial ratios representative for each of these categories. These financial ratios are: Current Ratio, Gross Profit Margin, Debt Ratio, and Receivables Turnover.Formula: Current assets M Current liabilitie
Gross Profit MarginFormula: Sales C Cost of Goods Sold / Sales or Gross Profit / Net SalesGross Profit Margin is part of the profitability ratios category. When Debt ratio is higher than 1, this indicates that the company s debt exceeds its assets. 5 is also an acceptable value (Value Based Management, 2007). However, the information provided by this ratio may not be very relevant unless it is compared with information regarding the industry in which the company activates. This ratio is useful mostly for determining the company s level of risk (Investopedia, 2007). This ratio is sometimes referred to as Working capital ratio or Real ratio, and it is considered to be the most important indicator on the company s financial situation. In other words, it reflects these receivables liquidity. Also, when comparing the Gross Profit Margin for one year with the previous year, one can determine whether the cost of sales or the gross profit is understated or overstated (Value Based Management, 2007). Basically, this ratio is very similar to liquidity ratios, except for the fact that Debt ratio refers to long term debt, while liquidity ratios refer to short term debt. Debt RatioFormula: Total Debt / Total Assets Debt ratio is part of the financial leverage ratios category. Specialists consider that the best Current ratio value should be close to 2, but 1. In other words, Gross Profit Margin indicates the company s production efficiency in comparison with the prices at which the goods were sold. When the Receivables Turnover has a low value compared to the industry average, it means that payment terms are too long. This indicator compares revenue from net sales to the cost involved in producing the company s goods. s or Inventory + Accounts Receivable + Cash Equivalents + Cash M Accruals + Accounts Payable + Notes PayableCurrent ratio is part of the liquidity ratios category.
Common topics in this essay:
Profit Margin,
,
Assets Debt,
Payable Current,
Receivables Turnover,
Gross Profit,
Formula Current,
gross profit,
Based Management,
debt ratio,
profit margin,
gross profit margin,
Accounts Receivable,
liquidity ratios,
receivables turnover,
current ratio,
financial ratios,
ratios category,
Total Debt,
ratios category ratio,
accounts receivable,
indicates company,
sales gross profit,
assets current liabilities,
value compared industry,
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