Ratio Analysis University of Phoenix
HCS/571 Finance Resource Management Sept 24, 2013Rosetta Stringfellow, MBA, BSRatio Analysis Ratio analysis is a widely used managerial tool that compares one number with another to gain insights that would not arise from looking at either of the numbers separately. Ratio analysis is used to examine and interpret the relationship between two numbers on a financial statement. This is done so that the managers of a facility can determine whether or not the organization needs to change any of their financial variables in order to remain competitive in their market. The ratio analysis converts numbers into meaningful comparisons which managers can use
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(Finkler et al., 2007)
For Norwalk Hospital this ratio translates as:
The difference between current ratio and quick ratio is not dramatic, but it gives insight to how much cash is really available at a given time. Outside investors such as creditors and shareholders are interested in solvency ratios. These ratios express long-term health of a company and the ability of the company to meet its payment obligations over a long period of time (usually over five years). One solvency ratio is the Total Debt to Equity ratio. (Finkler et al., 2007)
For Norwalk Hospital this ratio is expressed as: According to Finkler et al. (2007), a debt to equity ratio of 1 indicates liabilities of $1 for each dollar of net asset. As the Total Debt to Equity ratio becomes smaller the future of business operations of the company becomes healthier. Norwalk Hospital maintains this ratio below that of the average in the healthcare industry (average of 3), but is moving up by a small amount. The management team could consider taking a look at 2012 operations and identifying the triggers that moved this ratio higher to
Debt ratio - The Debt/Equity ratio is a measure of a company 's financial leverage and indicates what proportion of equity and debt the company is using to finance its
Ratio analysis are useful tools when judging the performance of a company by weighing and evaluating the operating performance (Block-Hirt). There are 13 significant ratios that can separate by four main categories,
A Debt Ratio above 100% indicates that a company has more debt than equity. Riordan has a low level of debt compared to its equity, which informs us that it is safe to lenders and investors. The Debt Ratio for its industry is 1.85.
The Quick ratio also measures the short-term liquidity of the firm and its ability to pay off its dues. It is considered to be more reliable and accurate than the Current ratio since it deducts the inventory, which, as mentioned earlier, is the least liquid constituent of current assets. More importantly, the Quick ratio
Ratio analysis are useful tools when judging the performance of a company by weighing and evaluating the operating performance (Block-Hirt). There are 13 significant ratios that can separate by four main categories,
This paper examines financial ratio analysis by defining, the three groups of stakeholders that use financial ratios, the five different kinds of ratios used and their applications, the analytical tools used in analysis, and finally financial ratio analysis limitations and benefits.
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).
Ratios describe the various relationships among accounts in the balance sheet and income statement. Financial ratios are important and helpful gauges of how an organization is functioning. An organization’s financial health, potential revenue, and even possible bankruptcy can be garnered from financial ratios. Information derived from financial statements is used to calculate most ratios and make projections. “Ratios help investors and lenders determine the risk associated with lending or investing funds in an organization” (GE Financial Healthcare Services, 2003, para 1). According to Finkler and Ward (2006), “the key to interpretation of ratios is benchmarks. Without a basis for comparison, it is
Ratio analysis is generally used by the company to provide some information on how the company has performed during that year, so that the parties involved including shareholders, lenders, investors, government and other users could make some analysis before making any further decision towards that particular company. As mentioned by Gibson (1982a cited in British Accounting Review, 2002 pg. 290) where he believes that the use of ratio analysis is such an effective tool to evaluate the company’s finance, and to predict its future financial state. Ratios are simply divided in several categories; these are the profitability, liquidity, efficiency and gearing.
For a stable company, current assets should always exceed current liabilities. Quick ratio takes into account the stock level while cash ratio is a significant determinant of cash levels and most liquid sources.
Vodafone has been reeling primarily because its growing mobile businesses in countries such as India and Turkey have failed to offset exposure to challenged European markets that comprise the bulk of its empire.
When evaluating the company’s profitability, we pay attention to the following ratios which are commonly analyzed: Net Profit Margin, Accounts Receivables Turnover, Return on Assets and Return on Equity. From the tables and figures, all the ratios have increased over the past five years except for 2012. This means UPS is overall a healthy company and does a good job at generating profits.
Ratio analysis is a very useful tool when it comes to understanding the performance of the company. It highlights the strengths and the weaknesses of the company and pinpoints to the mangers and their subordinates as to which area of the company requires their attention be it prompt or gradual. The return on shareholder’s fund gives an estimate of the amount of profit available to be shared amongst the ordinary shareholders; where as the return on capital employed measures an organization 's profitability and the productivity with which its capital is utilized. Return on total assets is a profitability ratio that measures the net income created by total assets amid a period.
The debt to assets ratio is a pointer of the quantity of a company's assets that are being financed with debt, rather than equity. A ratio greater than 1 indicates that a large amount of assets are being funded with debt, while a low ratio indicates that the mass of asset money is coming from equity. The ratio is used to determine the financial threat of a business.
The liquidity ratio or quick ratio according to Sobel, M “MBA in a nutshell”, is another measure of short-term solvency, in relative terms. This is considered a conservative indicator, according to Sobel, M “MBA in a nutshell”, given that the assets represented in the numerator of the ratio do not include inventory, which is difficult to liquidate quickly. The formula that expresses this is: