Financial Ratios
GROUP 1 REPORT FINANCIAL RATIOS
Financial ratios are useful indicators of a firm’s performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios can be used to analyze trends and to compare the firm’s financials to those of other firms. In some cases, ratio analysis can predict future bankruptcy.
SOURCES OF DATA FOR FINANCIAL RATIOS
Balance Sheet Income Statement Statement of Cash Flows Statement of Retained Earnings
PURPOSE AND TYPES OF RATIOS
Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used: a. b. c. d. e. Liquidity ratios Asset turnover ratios Financial leverage ratios Profitability ratios Dividend policy ratios
Financial ratios allow comparisons
between companies between industries between different time periods for one company between a single company and its industry average
Ratios generally are not useful unless they are benchmarked against something else, like past performance or another company. Thus, the ratios of firms in different industries, which face different risks, capital requirements, and competition, are usually hard to compare.
LIQUIDITY RATIOS
Liquidity ratios provide information about a firm’s ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the fir. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio. The current ratio is the ratio of current assets to current liabilities:
Current Assets Current Ratio = Current Liabilities
Short-term creditors prefer a high current ratio since it reduces their risk. Shareholders may prefer a lower current ratio so that more of the firm’s assets are working to grow the business. Typical values for the current ratio vary by firm and industry. For example: Firms in cyclical industries
Financial ratios are useful indicators of a firm’s performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios can be used to analyze trends and to compare the firm’s financials to those of other firms. In some cases, ratio analysis can predict future bankruptcy.
SOURCES OF DATA FOR FINANCIAL RATIOS
Balance Sheet Income Statement Statement of Cash Flows Statement of Retained Earnings
PURPOSE AND TYPES OF RATIOS
Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used: a. b. c. d. e. Liquidity ratios Asset turnover ratios Financial leverage ratios Profitability ratios Dividend policy ratios
Financial ratios allow comparisons
between companies between industries between different time periods for one company between a single company and its industry average
Ratios generally are not useful unless they are benchmarked against something else, like past performance or another company. Thus, the ratios of firms in different industries, which face different risks, capital requirements, and competition, are usually hard to compare.
LIQUIDITY RATIOS
Liquidity ratios provide information about a firm’s ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the fir. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio. The current ratio is the ratio of current assets to current liabilities:
Current Assets Current Ratio = Current Liabilities
Short-term creditors prefer a high current ratio since it reduces their risk. Shareholders may prefer a lower current ratio so that more of the firm’s assets are working to grow the business. Typical values for the current ratio vary by firm and industry. For example: Firms in cyclical industries