Question

What is the purpose of a financial ratio analysis? Identify and define a financial ratio for each of the following categories: o Liquidity Ratios o Leverage Ratios o Activity Ratios o Profitability Ratios o Growth Ratios Which do you think is/are most important to a company in making financial forecasts? o Then find the Liquidity Ratios, Leverage Ratios, activity ratio, profitability ratios, and growth ratios for The Bank of New York Mellon Corporation APA format

Answer 1

1. Purpose of financial ratio analysis is to know the financial well being of the company by making the ratios comparable to that of industry benchmark or peers. This gives a clear picture of the liquidity, activity and leverag, performance of the company which can be compared to the previous years to get an idea of the trend of company.

Liquidity ratio: current Ratio = current assets/current Liabilities. Tells us the level of current assets over current Liabilities, do the company have enough liquidity to meet its current short term liabilities.

Activity ratios: inventory turnover ratio : COGS/average inventory= the time in which the company's raw material is turned into finished goods and sold. The time it takes to turn inventory into cash. Higher is appreciated.

Leverage ratios = debt/equity ratio = tells how much debt is utilised over equity.

High debt can be risky, therefore the lower ratio, the better financial position.

Profitability ratios= NPM= NP/sales*100= this is the ℅ profit earned by the company over its sales.

Higher is desirable.

Growth ratio= price/earnings is PE multiple. PE multiple when divided by growth rate gives us PEG ratio.

This is the ratio which tells how expensive the stock is?

All these ratios play a major role in forecasting, the most important would be activity and profitablity ratios as they can help us in establishing sales for the future periods, deriving the profits that could be earned etc. Which will be the basis of forecast.