Financial ratios
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Financial ratios are important to the understanding of the financial health of a company. You and your colleagues work for a financial services firm. Your are discussing the merits of the various financial ratios. Identify four financial ratios and state what they tell you about a firm and why it's important to understand what these ratios mean to both a bank and an investor. Be sure to include your reasoning regarding these issues.
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The response addresses the queries posted in 291 words with references.
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//In this paper, light is shade on the financial ratios. Various merits concerning with the financial ratios are also discussed in this paper. Merits of the financial ratios are significant to analyze the position of the same and give important knowledge that how different kinds of firms use these financial ratios//
Financial ratios are important to have the understanding of the financial health of a company. This statement is completely true. Financial ratios can be described as, "Ratios, which are useful for evaluating the performance of business and comparing two selected numerical values, which are taken from an organization's financial statements". These are also known as accounting ratios, because these are based on the data taken from the financial accounts. Merits of the financial ratios are as follow: financial ratios assist management in its basic function of forecasting, planning, co-ordination, control, and communication. Apart from these, financial ratios consist of various other merits, such as, simplification of accounting figures (Bull, 2007).
Liquidity position: It is also measured by financial ratio. Ratio analysis helps in measuring the liquidity position of the firm. Liquidity position of a firm is said to be adequate if it is able to meet its present obligations only. A firm meets its current obligations, when it posses sufficient liquid funds to pay interest on short-term funds within a year as well as the principal sum. Hence, these ratios are used for the purpose of credit analysis by banks and other short term lenders.
Measures operational efficiency: Financial ratios are also useful in measuring the operational efficiency. They evaluate the firm's performance over a period of time by comparing the present ratios with the past ratios.
Profitability measurement: The ...
Education
- MBA (IP), International Center for Internationa Business
- BBA, University of Rajasthan
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