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Essay on Ratio Analysis

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Ratio Analysis

Ratios are a method of summarising and presenting financial information in an easily understandable form. They are used to assist us in assessing the performance of a business by identifying relationships between different figures that are considered to be significant. Ratios can be split into five groups, these five groups are: 1. Cash Flow – These ratios measure the businesses ability to meet financial commitments from cash flow.

2. Liquidity – These assess the businesses ability to meet the current liabilities as they fall due.

3. Asset Management – These show the speed of funds through the business operating cycle and how effectively working capital is managed.

4. Stake – These …show more content…

b) Interest Cash Cover

The Interest Cash Cover is an indication of the businesses ability to service total interest commitments from cash generated from operations. Compared to the Interest Cover ratio in the stake section this ratio gives a far better indicator, given that profit is not equivalent to cash.

The interest cash cover figure for 2004 shows that Allied Waste
Disposal plc can meet its interest commitments just over 63 times from its operations. This is a decrease f just under 7%, this can be due to two reasons; the first is an increase in the amount of interest paid, the second is an increase in the cash flow from operations or it can be both of these factors.

Liquidity
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Liquidity has an immediate bearing on the financial profile of a business and therefore its ability to survive. A business that cannot turn its current assets into cash runs the risk of failing. It is essential therefore that when we look at a business, that they are appropriate i.e. long-term facilities are used for longer term/fixed assets, and short-term facilities for working capital. This should ensure an acceptable structure to the balance sheet and mean that the business should have sufficient cash to ensure the servicing and repayment of its short-term debts.

a) Current Ratio (also known as the Liquidity Ratio)

The current ratio gives an indicator of the number of times the

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