# Financial Ratios Essay

1059 words - 4 pages

Investors and other external users of financial information will often need to measure the performance and financial health of an organization. This is done in order to evaluate the success of the business, determine any weaknesses of the business, compare current and past performance, and compare current performance with industry standards. Financially stable organizations are desirable, because a financially stable business is one that successfully ensures its ability to generate income for investors and retain or increase value.

There are many different methods that can be used alone or together to help investors assess the financial stability of an organization. One of the most common methods is financial ratio analysis. The basic ratios include five categories: profitability ratios, liquidity ratios, debt ratios, and asset activity ratios.

Profitability Ratios

Profitability ratios measure the profitability of the organization. They include the gross profit margin, operating profit margin, net profit margin, the return on assets (ROA) ratio, and the return on equity (ROE) ratio.

The gross profit margin is calculated by taking the amount of gross profit and dividing it by sales. This ratio is used to determine the amount of profit remaining from each sales dollar after subtracting the cost of goods sold. Example: a gross profit margin of 0.05 indicates that 5% of sales revenue is left to use for purposes other than the cost of goods sold.

The operating profit margin is calculated by taking earnings before income and taxes and dividing it by sales. This ratio is used to determine how effective the company is at keeping production costs low. Example: an operating profit margin of 0.17 indicates that after subtracting all operating expenses 17% of sales revenues remain.

The net profit margin is calculated by taking the net earnings available to common stockholders and dividing it by sales. This ratio is used to determine the amount of net profit for each dollar of sales that remains after subtracting all expenses. Example: a net profit margin of 0.084 indicates that 8.4% of each sales dollar remains after all expenses are paid.

The ROA ratio is calculated by taking the net earnings available to common stockholders (net income) and dividing it by total assets. This ratio is used to determine the amount of income each dollar of assets generates. Example: an ROA ratio of 0.0568 indicates that each dollar of company assets produced income of almost \$0.06.

The ROE ratio is calculated by taking the net earnings available to common stockholders and dividing it by common stockholders' equity. This ratio is used to determine the amount of income produced for each dollar that common stockholders have invested. Example: An ROE ratio of 0.0869 indicates that the company returned 8.69% for every dollar invested by common stockholders.

Liquidity Ratios

Liquidity ratios measure the organizations ability to meet short-term...

## Find Another Essay On Financial Ratios

### Louis Vuitton 2009 Financial Analysis. Includes: Luxury market analysis, Competitors analysis, FInancial statement evaluation, Accounting ratios analysis.

8414 words - 34 pages Untitled ESCP-Europe School of Management Master in European Business Financial Accounting Project Analysis of LVMH 2009 Financial Position s Andrea Pierobon, Eric Paul Sadler, Carolin Rademacher, Marco MagnettoThe History of Louis Vuitton In 1835, at the age of 15, Louis Vuitton became an apprentice packer and trunk-maker under the famous Monsieur Maréchal in Paris

### final year project Essay

871 words - 4 pages This study is examines the empirical relationship and effect between financial ratios and financial performance in Malaysia banking industry. There are many methods are used to measure the bank’s financial performance, financial ratios are one type of methods which is used by company to indicate the fundamental causes underlying a company’s strengths and weaknesses. Financial ratios can be divided into two types which is primary and secondary

### Analysis of Verizon Communications

1677 words - 7 pages comparison to its competitors (marketing). 4. Verizon's financial position is not very impressive. The company has \$49 billion debt load. Moreover the Gross Profit Margin of 2003 has decreased to 0.67, which was 0.70 in 2002 (financial/accounting). 5. Verizon Communications is not well placed against its competitors like AT&T who offer services using technologies like TDMA (time division multiple access) (production). FINANCIAL RATIOS

### Final Paper

981 words - 4 pages A financial ratio is a ratio of selected values on a company's financial statements. There are a few common ratios used to measure the overall financial condition of an organization. Financial ratios are used by managers, stockholders and creditors. Security analysts use these various ratios in order to compare the strengths and weaknesses within the selected companies. Decimal values and percentages are used to express the ratios. Financial

### ADC Tellecommunications Financial Ratio Analysis

1519 words - 6 pages like asynchronous transfer mode (ATM), synchronous optical networks (SONET) and most wireless communications systems, provide significant opportunities for ADCT. The company currently focuses on enabling communications service providers to deliver high-speed services to residential and commercial customers. The following is an annual analysis of ADCT's financial ratios of years 1995-1999. Overall Performance Measures      The averaged price

### Financial Ratio Analysis of Microsoft

889 words - 4 pages long-term investments as to their shareholders' pocket. Microsoft has good financial standing and controls a lot of the computer industry.2.Efficiency RatiosAsset turnover ratio and net income per employee are good measures for a company's efficiency. The former ratio shows management's ability to use assets to produce sales, while the latter indicates the employee's productivity. If either of these two ratios is low, inefficiency may be an

### Financial Ratio Analysis

1451 words - 6 pages Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This

### Financial Statement and Ratio Analysis: Key Tools to Successful Financial Management

2633 words - 11 pages stockholder's equity; the statement of stockholder's equity reports capital transactions with owners. The income statement records the flow of resources over time and reflects revenues, expenses, gains and losses; the statement of cash flows includes operating, investing, and financing inflows and outflows of cash (Mautz & Angell, 2006).Managers use financial statements to form financial ratios, which "highlight different aspects of a company's

### mfrd asm

505 words - 2 pages statements 4.1 Compare appropriate formats of financial statements for different types of business 4.2 Interpret financial statements using appropriate ratios and comparisons both internal and external 4.3 Merit grades awarded M1 M2 M3 Distinction grades awarded D1 D2 D3 Assignment ( ) Well-structured; Reference is done properly / should be done (if any) Overall, you've Areas for improvement: ASSESSOR

### Ratio Analysis Paper

1236 words - 5 pages a business is trying to show the better financial performance orposition which can be misleading to the users of financial accounting. In order to improve on itsprofitability level with the company it may select revaluation to only the assets in which willresult in surplus leaving those with deficits still at depreciated historical cost.Information problems on ratios need to be interpreted carefully because they canprovide clues to the company's

### Managerial and Finanical Accounting Report

605 words - 2 pages flow analysis, break even analysis, budgeting, and financial ratio analysis. Management accounting can be used to plan for the future by understanding how economic events affect the business (Bromwich, 1988). Managers can evaluate the state of the business by looking at efficiency, and analyzing costs.There are several ratios which are useful to managers. Liquid ratios measure the company's ability to meet obligations using available assets

## Similar Essays

### Financial Ratios Essay

2504 words - 10 pages to identify the capabilities of a company in economic terms, so as to enable first line management to determine the business's objectives and targets, concerning its operations.In an effort to examine an organisation in financial terms, so as to provide managers with sufficient information, referring to its economic evolution, certain financial statements have evolved, such as Balance Sheet, Trial Balance, Profit and Loss Account, Ratios and so

### Financial Ratios Analysis

1474 words - 6 pages In order to determine the financial health of Wyeth, financial analysts and investors depend highly on ratios. Ratios are important profit tools in financial analysis that help financial analysts apply plans that improve profitability, liquidity, financial structure leverage, and interest coverage (Saksonova, 2006). Although ratios are compiled on past records, financial ratios can give us a hint of the future problems.Company - Wyeth ( WYE

### Hasbro Financial Ratios And Assessment Essay

1406 words - 6 pages repurchase of \$504.8 million since June of 2005. 2006's year end share price was \$27.25, an increase of 34% since 2005.The following selected ratios are provided from their 2006 Annual Report as analysis of Hasbro's economic status:a.Liquidity ratiosCurrent Ratio = Current Assets / Current Liabilities= \$3,096,905,000 / \$1,559,015,000 = 1.99Quick Ratio = (Current Assets - Inventory) / Current Liabillities= (\$3,096,905,000 - \$203,337,000

### Inadequacies Of Accounting Ratios As Tools Of Financial Analysis.

1480 words - 6 pages Ratio analysis provides an indication of a company's liquidity, gearing and solvency. But ratios do not provide answers; they are merely a guide for management and others to the areas of a company's weaknesses and strengths (Palat 1999).However, ratio analysis is difficult and there are many limitations. This section will identify and discuss the inadequacies of accounting ratios as tools of financial analysis.ACCOUNTING POLICIES.It is difficult