Financial Ratio

Topics: Investment, Risk, Finance Pages: 4 (1212 words) Published: May 2, 2013
Kenji LeKair Patton
Finance 100 Week Eight : Assignment: Understanding the Concepts
Professor Lorna Johnson
February 24, 2013

A financial ratio is a simple mathematical comparison of two or more entries from a company's financial statements. Business owners and managers use ratios to chart a company's progress, uncover trends and point to potential problem areas in a business Financial ratios are relationships determined from a company's financial information and used for comparison purposes. Examples include such often referred to measures as return on investment (ROI), return on assets (ROA), and debt-to-equity, to name just three. These ratios are the result of dividing one account balance or financial measurement with another. Usually these measurements or account balances are found on one of the company's financial statements—balance sheet, income statement, cash flow statement, and/or statement of changes in owner's equity. Financial ratios can provide small business owners and managers with a valuable tool with which to measure their progress against predetermined internal goals, a certain competitor, or the overall industry. In addition, tracking various ratios over time is a powerful means of identifying trends in their early stages Explain the advantages and disadvantages of debt financing and why an organization would choose to issue stocks rather than bonds to generate funds. The primary advantage of debt financing is that it allows the founders to retain ownership and control of the company. In contrast to equity financing, the...
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