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Ratio analysis and financial analysis

Tell what four ratios would be helpful in assessing the financial strength of a company and why each ratio would be helpful.

Which is more important to the short-term lender: the stock of cash or the flow of cash? Why?

Can a businesses operate with no current liabilities? Why?

Solution Preview

Ratios depict the relation between the two items in the financial statements. Ratios are helpful to analyse the financial strength or weakness of the particular undertaking. Ratios are helpful to reveal the inner strength/weakness, thereby showing the real picture of the financial statements. Ratios are helpful in interfirm or intrafirm comparison.

Four ratios that would be helpful in assessing the finacial strength of the undertaking are as follows:

1.Net Profit Ratio:

Net Profit/Turnover * 100

Here net profit means Gross profit- operating expenses and administrative expenses

Gross Profit= sales-cost of production

Cost of production=opening stock+ purchases-closing stock+direct expenses.

If this ratio is higher than the industrial standard or if it is higher than other competing firms in the same industry, then it shows that the company is able to generate sufficient profit from ...

Solution Summary

The answer contains the ratios which are helpful for assessing the financial strength of the company, importance of stock of cash and flow of cash to short term lender and also answers for whether the company can operate without any current liabilities.

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