Ratio Analysis-Detailed

# Ratio Analysis-Detailed - Copyright 2005-2006 JaxWorks All...

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© Copyright, 2005-2006, JaxWorks, Al Rights Reserved. Ratios Introduction This workbook produces 12 important financial ratios. These ratios are usually thought of as belonging to four basic categories: profitability ratios, liquidity ratios, activity ratios, and leverage ratios: Category Ratio Profitability ratios Earnings Per Share Gross Profit Margin Net Profit Margin Return on Assets Return on Equity Liquidity ratios Current Ratio Quick Ratio Activity ratios Average Collection Period Inventory Turnover Leverage ratios Debt Ratio Equity Ratio Times Interest Earned This is by no means an exhaustive list of the ratios that have been developed to help analyze a company's financial position and the way that it conducts business. It is, however, representative. Analyzing Profitability Ratios If you are considering investing money in a company, its profitability is a major concern. If the company intends to pay dividends to its stockholders, those dividends must come out of its profits. If the company hopes to increase its worth in the marketplace by enhancing or expanding its product line, then an important source of capital to make improvements is its profit margin. There are several different, but related, means of evaluating a company's profitability. Analyzing Liquidity Ratios The issue of liquidity, as you might expect, concerns creditors. Liquidity is a company's ability to meet its debts as they come due. A company may have considerable total assets, but if those assets are difficult to convert to cash it is possible that the company might be unable to pay its creditors in a timely fashion. Creditors want their loans to be paid in the medium of cash, not in a medium such as inventory or factory equipment. Analyzing Activity Ratios There are various ratios that can give you insight into how well a company manages its operating and sales activities. One primary goal-perhaps, the primary goal-of these activities is to produce income through effective use of its resources. Two ways to measure this effectiveness are the Average Collection Period and the Inventory Turnover rate. Analyzing Leverage Ratios

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Ratio Analysis-Detailed - Copyright 2005-2006 JaxWorks All...

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