Study on a Company's Financial Ratios

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1. Financial ratios are used to help analyze the company's financial statements. For a small company that is not publicly traded, the most important use of ratios is to compare current performance against past performance. Ratios cover a number of performance metrics that can help a business to benchmark performance against publicly traded companies as well, provided that the business has put together its internal statements according to GAAP, making them compatible with the statements of publicly-traded companies. Ratios cover liquidity, solvency, managerial efficiency, leverage and profitability (NetMBA, 2010). A larger corporation often pays attention to the key ratios, not only because they are an indicator of performance, but because they realize that external parties use these ratios as well. For all companies, ratios are sometimes used by external stakeholders. Lenders such as banks, for example, not only look at the firm's liquidity ratios to determine its ability to pay back any loan, but will often attach restrictive covenants based on leverage and free cash flow. There are also ad hoc ratios that are used by firms, not considered to be the staple financial ratios but critical measures of success nevertheless. Airlines, for example, measure their load factors and hotels their occupancy rates. It is important for any firm to utilize a variety of measures, whether they are firm specific, industry specific or common to all public companies. 2. There are
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