Question

1.Someone can evaluate an organization’s performance by viewing certain financial ratio's. What are ratio's and how can someone best use them?

2.An organization operates in international markets, they are involved with foreign exchange (FX) markets. Why is it important for an international organization to understand FX?

Answer 1

1.One way to analyze your financial health and identify how it might be improved is by looking closely at your financial ratios. Ratios are used to make comparisons between different aspects of a company's performance or how the company stacks up within a particular industry or region. They reveal very basic information such as whether you have accumulated too much debt, stockpiled too much inventory or are not collecting receivables fast enough.The basic categories are:

Liquidity Ratios-These measure the amount of liquidity (cash and easily converted assets) that you have to cover your debts, and provide a broad overview of your financial health.Example-Current Ratio

Efficiency Ratios-Often measured over a 3- to 5-year period, these give additional insight into areas of your business such as collections, cash flow and operational results. Example-Inventory Turnover Ratio

Profitability Ratios-These ratios are used not only to evaluate the financial viability of your business, but are essential in comparing your business to others in your industry. You can also look for trends in your company by comparing the ratios over a certain number of years.Example-Net Profit Margin

Leverage Ratios-These ratios provide an indication of the long-term solvency of a company and to what extent you are using long-term debt to support your business.Example-Debt to Equity Ratio.

2.The forex market is the backbone of international trade and global investing. It is critical to support imports and exports, which are necessary to gain access to resources and to create additional demand for goods and services. The results of companies that operate in more than one nation often must be translated from foreign currencies into U.S. dollars. Exchange rate fluctuations make financial forecasting more difficult for these companies, and also have a marked effect on unit sales, prices, and costs