Question

Describe key financial ratios and its benchmark for a corporation(atleast 10).Describe some limitation of financial ratio analysis.Describe enterprise value in detail.which financial ratio do you think are most important when evaluating a company? how can a company improve its gross profit margin and net profit margin? how can a company improve its ROA and ROE? how can debt be dangerous for a company? why should a company have a lean balance sheet? how does a company show liquidity on the balance sheet? what important assets are left off the balance sheet(think of coca-cola)?

very urgent

Answer 1

Current ratio = Current assets / Current liabilities

Acid-test ratio = Current assets – Inventories / Current liabilities

Cash ratio = Cash and Cash equivalents / Current Liabilities

Debt ratio = Total liabilities / Total assets

Debt to equity ratio = Total liabilities / Shareholder’s equity

Interest coverage ratio = Operating income / Interest expenses

Debt service coverage ratio = Operating income / Total debt service

Asset turnover ratio = Net sales / Total assets

Inventory turnover ratio = Cost of goods sold / Average inventory

Gross margin ratio = Gross profit / Net sales

Return on assets ratio = Net income / Total assets

limitation of financial ratio analysis

Historical Information: Information used in the analysis is based on real past results that are released by the company.

Inflationary effects: Financial statements are released periodically and, therefore, there are time differences between each release.

Changes in accounting policies: If the company has changed its accounting policies and procedures, this may significantly affect financial reporting.

Operational changes: A company may significantly change its operational structure, anything from their supply chain strategy to the product that they are selling.

Seasonal effects: An analyst should be aware of seasonal factors that could potentially result in limitations of ratio analysis.

Manipulation of financial statements: Ratio analysis is based on information that is reported by the company in its financial statements.

financial ratio do you think are most important when evaluating a company?

1)Price to Earning Ratio

2) Asset turnover ratio

3) Prfit ratio

4 ) liquidity ratio

5) Inventory Turnover Ratio

how can a company improve its gross profit margin and net profit margin?

* Increasing Selling price

* Reduce Cost

* Large Voulme of Turnover

how can a company improve its ROA and ROE?

1. Use more financial leverage
Companies can finance themselves with debt and equity capital. By increasing the amount of debt capital relative to its equity capital, a company can increase its return on equity.

2. Increase profit margins
As profits are in the numerator of the return on equity ratio, increasing profits relative to equity increases a company's return on equity.

3. Improve asset turnover
Asset turnover is a measure of a company's efficiency. You can calculate it by dividing sales by the company's total assets.

4. Distribute idle cash
This is becoming a common problem among corporate giants, particularly those in the technology industry

how can debt be dangerous for a company?

Higher Debt Lead to Higer interst Pay out it Leads to Liquidity Problems