Explore BrainMass

Explore BrainMass

    Improvement of Financial ratios

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    What can a company can do to improve its financial ratios?

    © BrainMass Inc. brainmass.com June 3, 2020, 10:00 pm ad1c9bdddf

    Solution Preview

    In financial analysis, we need qualitative information and try to read between the numbers. We have to ask all the right questions. Over the years, there are some ratios, which have become more popular and handy for rule of thumb analysis of financial statements. Our purpose in this note is not deride them but to advice the reader to use them properly to derive the correct results.
    Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things. In other words it helps in inter firm and intra firm comparison.


    We should first focus on ratios which needs to be improved first:

    Profitability ratios
    try to measure how profitable the firm is. Note that their success in this endeavor depends on how accurately the financial statements reflect reality.

    Gross Margin Percentage.

    The gross margin percentage is defined to be the gross margin as a percentage of sales revenue.
    It indicates the operational efficiency. The gross margin percentage can be expected to improve as sales increase. This occurs because fixed manufacturing costs are spread across more units.

    Profit Margin on Sales = Net Income available to Common Shareholders / Sales
    It indicates the overall efficiency of the business.

    Liquidity ratios measure the ability of a firm to satisfy obligations due in the near future, usually within the next year.
    The Current Ratio = Current Liabilities / Current Assets
    A current ratio of less than 1:1 is usually unacceptable since in that case current liabilities would exceed current assets?a warning that there may soon be a cash flow problem. A general rule of thumb calls for a current ratio of 2:1. Its liquidity is adequate as its ratio is more than 2:1. Thus this ratio is ...

    Solution Summary

    This discusses the ways for improvement of Financial ratios of an organization