Defining Financial Ratios
BSA/500 – Business Systems I
August 11, 2013
The concept of forecasting financials is as much about calculating the data is its about understanding the data. A simple concept of calculating the larger perspective for a simple index can be the keys to understanding the direction of the company. Calculating that direction will help those who associate with the company as owners, lenders, and board members to know if the company is credit worthy, turnaround on accounts receivables, and the long term financial health of the company.
Current Ratio – this measures the extent to which current assets are available to meet current liabilities (current meaning due within the next 12 months). Current ratio indicates whether the business has enough working capital – i.e. the excess of current liabilities over current assets used to meet short-term obligations, quickly take advantage of opportunities, and qualify for favorable credit terms.
“The higher the ratio, the more liquid the company is. Commonly acceptable current ratio is 2; it's a comfortable financial position for most enterprises. Acceptable current ratios vary from industry to industry. For most industrial companies, 1.5 may be an acceptable current ratio” (ReadyRatio, 2013)
Debt Ratio – “A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load” (Investopedia, 2013)
Profit Margin – “higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20\% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales” (Investopedia, 2013)
Return on Assets (ROA) – An indicator of how profitable a company is relative to its total...
References: ReadyRatio. (2013). Retrieved from http://www.readyratios.com/reference/liquidity/current_ratio.html
Investopedia. (2013). Retrieved from http://www.investopedia.com/terms/d/debtratio.asp
Investopedia. (2013). Retrieved from http://www.investopedia.com/terms/p/profitmargin.asp
Investopedia. (2013). Retrieved from http://www.investopedia.com/terms/r/returnonassets.asp
Investing Answers. (2013). Retrieved from http://www.investinganswers.com/financial-dictionary/ratio-analysis/price-earnings-ratio-pe-459
Apollo Group, Inc. (2013). Riordan Manufacturing. Intranet – Riordan Manufacturing. Retrieved from BSA / 500 Business Systems I course website
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