# Financial Ratios

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Financial Ratios
Interpreting Financial Results
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July 22, 2013

Interpreting Financial Results
Liquidity: Current Ratio Parrino, Kidwell, & Bates (2012) detail the current ratio as current assets divided by liabilities. The current ratio identifies a firm’s potential to pay short-term liabilities; higher liquidity is a good sign for potential creditors (Parrino et al., 2012). At the same time, however, the current ratio should not greatly exceed benchmarks of other competitors (Parrino et al., 2012). This could be indicative of mismanagement of current assets and less cash flow for investors (Parrino et al., 2012). Current assets (\$29,307,990) divided by current liabilities (\$20,530,890) gives a current ratio for ABC SDN. BHD. of 1.43. American Airlines Cargo, a benchmark competitor of ABC SDN. BHD., provides current assets (in millions) of 6,838 divided by current liabilities (in millions) of 8,780; this totals to a current ratio of 0.78(AMR Corporation, 2010). Air Canada, an additional benchmark competitor, has a current ratio of current assets (in millions) of 3,445 divided by current liabilities (in millions) of 3,062 to total to a current ratio of 1.125 (Air Canada, 2010). A benchmark analysis reveals that ABC SDN. BHD.’s current ratio is higher than other competitors. The statement of cash flows reveals a high level of receivables for ABC, where the firm could improve management of assets. Although the firm possesses the ability to pay its short-term debts, its money could be reallocated to operating more efficiently and benefiting investors.
Efficiency Ratio
Leverage Ratio
Profitability Ratio
The profitability ratios are used to analyze the company’s ability to generate revenues in comparison to the company’s expenses. When benchmarking the profitability ratios, having the same or higher value than the competitors during the same period indicates the company is doing well. ABC SDN. BHD. uses the following formula to calculate its gross profit

References: Air Canada. (2010). Air Canada annual report 2010 [PDF document]. Retrieved from http://www.aircanada.com/en/about/investor/documents/2010_ar.pdf AMR Corporation. (2010). AMR corporation 2010 annual report [PDF document]. Retrieved from phx.corporate-ir.net/External.File?item...t=1 Parrino, R., Kidwell, D. S., & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed.). Hoboken, N. J.: John Wiley & Sons.

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