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# Financial Ratios Used in Businesses

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Define the main categories of ratios used in analysis and provide one example of each (with the equation).

#### Solution Preview

There are many category division systems for financial ratios. One system divides ratios into two categories: solvency and profitability. Other systems have as many as five categories: leverage, liquidity, operating efficiency, profitability, and solvency. Any system of categorization will work, as long as the information can help the business to find out useful ways to maintain itself financially.

The system that is described here has four categories:

1. Liquidity is a measure of the business' ability to pay its short-term debts (which are due in less than than 1 year). This is the first set of ratios that can determine its ability to avoid bankruptcy. A basic example of a ratio in this category is the current ratio, which is the current assets divided by the current liabilities. What is desired is a result that is greater than 1, and as high a number as possible. Illustration: 1000/600 - 1.67

2. Profitability measures the return on an investment of a business' capital assets. It can also be a measure of the financial cushion per dollar of the gross profits of its ...

#### Solution Summary

This is a description of the various financial ratios that businesses use to determine its stability. Examples and illustrations are included.

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## Technical Knowledge of Accounting

Please provide help with the following questions:

SCENARIO:

You and your small group have been asked to create an informative slide presentation to managers, most of whom do not have a technical knowledge of accounting.

QUESTIONS:

1. First, you will discuss key elements with top executives.
2, How will investors assess the stability of our company?
3. What are the key financial ratios that measure the stability of an organization?
4. Define stability.

Objective:
Use financial ratio analysis to assess the stability of an organization.
Use effective communication techniques.

The student should understand why stability of an organization is important and what is meant by 'stability'. The student should also demonstrate an understanding of the key ratios which measure stability.

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