Financial Ratio Analysis Notes

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Financial ratio analysis is conducted by managers, equity investors, long-term creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios? Managers use financial statements to monitor measurements like debt leverage, costs, sales, assets and liabilities. Financial statements help managers assess achievement of financial goals.

Analysis of financial ratio helps equity investors to know whether their investment earnings any return or not. The emphasis would be placed on whether the company earning higher or lower return compared to previous year, the industry average and the biggest competitors within the same industry. Analysis of financial ratios assists Short term creditors to know the ability of company to pay their short term obligation. Calculation of Current ratio, receivable turnover and accounts payable are some of the ratios that helps short term creditors to analyze company’s credit history. Financial ratios analysis helps long term creditors to know company’s ability to meet interest expenses and long term obligations on time. Times interest earned ratio, debt to total assets turnover ratio, debt to shareholders equity ratio are some of the ratios that are helpful for long term creditors.

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Over the past years, M. D. Rryngaert & Co. has realized an increase in its current ratio and drop in its total assets turnover ratio. However, the company’s sales, quick ratio, and fixed assets turnover ratio have remained constant. What explains these changes? The changes explain that company was not able to successfully manage their inventories. Due to the increase in inventory both current assets and current ratio increased whereas total assets turnover decreased. Since inventory does not affect quick ratio and fixed assets turnover, these ratios remain constant. Company’s sales have remained constant but inventory has increased. This situation shows that company is losing their money. 3-4...
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