There are five categories of financial ratios.
How much has the company borrowed? leverage ratios
How liquid is the company? Liquidity ration
How productively is the company using its assets? Efficiency ratios
How profitable is the company? Profitability ratios
How highly is the firm valued by investors? Market ratios
1) Explain at least 2 ratios in each category
2) Calculate the ratios you selected for a publicly traded company
3) Explain the output of the ratios you calculated
For your convenience, I have attaced an APA formatted MS Word file containing the text below.
Liquidity ratios, like the current ratio, provide information about a firm's ability to meet its short time financial obligations. Short-term creditors seek a high current ratio from prospective clients since it reduces their risk. For investors in a company, such as shareholders, a lower ratio is sought, so that more of a firm's assets are working to grow the business. When computing financial relationships, a good indication of the company's financial strengths and weaknesses becomes clear. Examining these ratios over time provides insight as to how effectively the business is being operated. The general consensus on liquidity ratios is; the higher the better, especially if a firm is reliant on any significant extent on creditors to finance their assets.
Taking the two liquidity analysis ratios, current and net working capital as seen in the table on the previous page, one can clearly see from its high current ratio that Google is in a far better position than both Yahoo and other firms in the Internet Information Providers Industry to quickly convert its assets into cash if the need arises. Google's high networking capital ratio, is an indication that the company also is more reliant on creditors to finance its abundant level of revenue producing assets.
Profitability ratios such as the (gross) profit margin, is a measure of a firm's gross profit earned on sales. The (gross) profit margin while considering the firm's cost of goods sold does not include any other cost. As can be seen in the previous chart, all three profitability ratios for Google are considerably higher than of Yahoo and the industry average, which in short means that for 2006, Google was more effective at managing its return on assets and equity, resulting in the company's substantially increased level of profitability over its peers.
The asset turnover ratio calculates the total sales (revenue) for every dollar of assets a company owns. A receivables turnover ratio can be used to quantify a firm's effectiveness in extending credit as well as collecting debts. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient. A low ratio on the other hand, implies a company ...
This file contains an APA formatted MS Word file, which conducts and in-depth financial analysis of both Google and Yahoo.