ratio analysis Essay

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Financial Ratios: What They MeanIn assessing the significance of various financial data, managers often engage in ratio analysis, the process of determining and evaluating financial ratios. A financial ratio is a relationship that indicates something about a company's activities, such as the ratio between the company's current assets and current liabilities or between its accounts receivable and its annual sales. The basic source for these ratios is the company's financial statements that contain figures on assets, liabilities, profits, and losses. Ratios are only meaningful when compared with other information.

Since they are often compared with industry data, ratios help managers understand their company's performance relative to that
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The most common is the price earnings (P/E) ratio. It is published daily with the transactions of the New York Stock Exchange, American Stock Exchange, and NASDAQ. These quotations show not only the most recent price but also the highest and lowest price paid for the stock during the previous fifty-two weeks, the annual dividend, the dividend yield, the price/earnings ratio, the day's trading volume, high and low prices for the day, the changes from the previous day's closing price.

The price to earnings (P/E) ratio is calculated by dividing the current market price per share by current earnings per share. It represents a multiplier applied to current earnings to determine the value of a share of the stock in the market. The price-earnings ratio is influenced by the earnings and sales growth of the company, the risk (or volatility in performance), the debt-equity structure of the company, the dividend policy, the quality of management, and a number of other factors. A company's P/E ratio should be compared to those of other companies in the same industry. The following is a listing of some of the ratios to be aware of in analyzing a company's balance sheet and income statement.

These ratios fall into four categories — liquidity, profitability, asset management (efficiency), and debt

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