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? Using research, obtain information on the financial ratios for Walmart. cite the resources apa,

Answer 1

Financial Ratio analysis is used to evaluate company’s financial performance like Liquidity, efficiency, profitability, solvency, etc. It is calculated by using key financial statements of the business. Companies have lot of financial information but it is important to exactly manage and interpret this data for taking decisions for the business. For example- When we have to take decision on finance, compare company’s economic position with other competitors, changes overtime,etc. in such situations ratios are more powerful. It helps in comparison as well analysing different aspects of business.

Liquidity Ratio- It shows that business ability to convert its assets into cash at any point of time without any difficulty. It is of different type’s like- current ratio, Quick ratio, Cash ratio, etc.

Profitability ratio- It shows the profitability of the business to earn profit. This communicate the financial performance of the company. It includes Net profit margin gross profit margin, return on assets, return on capital employed, earning per share, return on equity, etc.

Leverage ratios- It assess the company’s ability to pay off its long term debts like loans, etc. Also known as solvency ratios.

Activity ratios- It assess the operational efficiency of the business. It shows how effectively the business has converted sales into inventory and cash. It includes Inventory turnover ratio, payables turnover ratio, working capita turnover ratios,etc.

The most important financial ratios to the business for making financial forecasts are Leverage and Profitability ratios as they sows the operational efficiency and profitability of business.