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You have been given the financial statements and asked to analyze the financial performance of your division. Other managers have suggested you use financial ratios in your analysis. What are financial ratios? Which ratios might you use in your analysis? List them and explain what information they provide. How would you use them to make managerial decisions?

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Financial ratios are designed to help one evaluate a financial statement. For example, Firm A might have debt of \$5,248,760 and interest rate charges of \$419,900, while Firm B might have debt of \$52,647,980 and interest charges of \$3,948,600. To see which company is stronger, one will consider the burden of these debts, and the companies' ability to repay them. This can best be evaluated by comparing each firm's debt to its assets and by comparing the interest it must pay to the income it has available for payment of interest. These comparisons involve ratio analysis.

The ratios that I might use in my analysis are liquidity ratios, asset management ratios, debt management ratios, and profitability ratios.

Liquidity ratios show the relationship of a firm's or a division's cash and other current assets to its current liabilities. These types of ratios include current ratio and quick or acid test ratio. Current ratio is calculated by dividing current assets by current liabilities. It indicates the extent to which current liabilities are covered by ...

Solution Summary

This solution contains the analysis of the appropriate financial ratios of a company and how it assists in making managerial decisions.

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