Question

Financial ratios are essential to provide an accurate valuation of a firm. Select a publicly traded firm of your choice. Select one ratio each in the areas of (a) performance, (b) activity, (c) financing, and (d) liquidity warnings. Provide an evaluation of the selected firm's strengths and weaknesses. Based on the ratios you selected, how well does your chosen firm perform? Explain.

Answer 1

Financial Ratios are the numerical data using which the performance of the entity is analysed. They are financial extracts used for comparison purpose, with that of previous years on the same entity or with that of other competitive entity. These are used to evaluate the overall financial condition of a entity. The requirement and sources for computing the financial ratio's are taken from the entity's balance sheet, profit and loss account, income statement, cash flow statement, and/or statement of changes in owner's equity. Ratios are helpful to measure the progress of the entity while comparative to the goal of the entity, a certain competitor, or the overall industry. Ratios are also used by bankers, investors, and business analysts to assess a entity's financial status.

• Performance ratios. These ratios are derived from the revenue and aggregate expenses line items on the income statement, and measure the ability of a business to generate a profit. The most important of these ratios are the gross profit ratio and net profit ratio.
• Liquidity ratios. These ratios compare the line items in the balance sheet, and measure the ability of a business to pay its bills in a timely manner. Chief among these ratios are the current ratio and quick ratio, which compare certain current assets to current liabilities.
• Leverage and coverage ratios. These ratios are used to estimate the comparative amounts of debt, equity, and assets of a business, as well as its ability to pay off its debts. The most common of these ratios are the debt to equity ratio and the times interest earned ratio.
• Activity ratios. These ratios are used to calculate the speed with which assets and liabilities turnover, by comparing certain balance sheet and income statement line items. Rapid asset turnover implies a high level of operational excellence. The most common of these ratios are days sales outstanding, inventory turnover, and payable turnover.

Explanation:

I have considered the Bank of America as an example, Here attache the extracts regarding the ratios of the Bank.