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Analyze 4 different financial ratios including their uses

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Details: Financial ratios are important to the understanding of the financial health of a company. You and your colleagues work for a financial services firm. You 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 is important to understand what these ratios mean to both a bank and an investor. Be sure to include your reasoning regarding these issues.

Guidelines:
- Choose 4 different financial ratios from Web resources.
- Answer the following questions:
o What do they tell you about a firm?
o Why is it important for a bank to understand these financial ratios?
o Why is it important for an investor to understand these financial ratios?

Please list any references or web resources.

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Solution Summary

Discussion explains current ratio, times interest earned, days in receivables and return on assets. Thoughts are in everyday language suitable for novice.

Solution Preview

I have given you some web resources to use. There are lots to choose from if you just put the ratio into a Google search.

Current ratio (http://www.investorwords.com/1258/current_ratio.html)

This ratio tells you if a firm has enough short term liquid assets to pay bills that are coming due in the next year. Banks need to understand this because it can threaten the firm's ability to meet its short term obligations (like upcoming interest payments). Investors need to know if the firm has an adequate level of working capital to function without ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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