Discussion Question One Week Two
Who uses financial ratio analysis information? How can you determine if an organization is paying its bills? How can you determine if an organization is using too much debt? How can you compare an organization to its competitors? How can organizations with increasing sales run into difficulties?
Who uses financial ratio analysis information?
In financial analysis, we need qualitative information and try to read between the numbers. 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. Many different users have need for accounting information in order to make important decisions. These users include investors, creditors, management, governmental agencies, labor unions, bankers, customers, suppliers and others.
How can you determine if an organization will be unable to pay its bills?
Liquidity ratios measure the ability of a firm to satisfy obligations due in the near future, usually within the next year. The two most popular liquidity or working capital ratios are the current ratio and the acid test (quick) ratio:
• The Current Ratio = Current Liabilities / Current Assets
• Quick (Acid Test) Ratio = Current Assets - Inventories / Current Assets
Thus One has to see the current ratio to identify the liquidity position of the organization. If the current ratio is low (less than 1:1) or negative than the organization may not be able to pay its bill.
How can you determine if an organization is using too much debt?
The debt management ratios, measures the company's ability to meet its long-term obligations as they become due. Thus one can use the Debt equity ratio= Debt/equity. If this ratio is high than one can say that organization is using too much debt.
How can organizations with increasing sales run into difficulties?
It can run into difficulties if it doesn't have sufficient funds in order to manage the growing operations due to growth in sales. This is because Increasing sales will require more ...
How organizations with increasing sales run into difficulties are analyzed.