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Questions About Financial Ratios

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 4 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.

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

Solution Preview

Choose 4 different financial ratios.

The four different financial ratios selected are the current ratio, the debt-equity ratio, the net profit margin and the earning per share.

Answer the following questions:

- What do they tell you about a firm?

The current ratio shows the liquidity position of the firm. This ratio shows if the firm will be able to pay off its current liabilities. The current ratio is calculated by dividing the current assets by current liabilities. The debt-equity ratio is a measure of the leverage of the firm. It gives us the proportion of long term debt being used to finance the operations of the firm. The debt equity ratio is calculated by dividing the long term debt of a firm by the stockholders equity. The third ratio is the net profit margin ...

Solution Summary

The solution provided includes the current ratio, the debt-equity ratio, the net profit margin and the earning per share selected as the four different financial ratios. 2 references are noted with 548 words total.

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