Question

We have covered several ratios in this unit that users of financial statements can work with to evaluate a company’s performance. However, not all ratios are important for or applicable to all organizations. In particular, service organizations have different business models than manufacturing organizations. Using the CPA Firm you worked with for your Unit 5 portfolio assignment, explain which financial ratios would be applicable to the company and which would not. State the reasons for your assertions.

As portfolio activities are to be self-reflective, please make sure to connect the portfolio assignment to:

• Your personal experiences. Reflect on how this assignment topic is applicable to and will benefit you.
• Course readings and any external readings.
• Discussion forum posts or other course objectives.

The Portfolio Activity entry should be a minimum of 500 words and not more than 750 words. Use APA citations and references if you use ideas from the readings or other sources.

Answer 1

Solvency Ratios:

Debt - Equity Ratio :The degree to which the company is financing its operations through debt versus wholly-owned funds.

Interest Coverage Ratio : To determine how easily the company can pay interest on its outstanding debt.

Liquidity Ratios:

Current Ratio : To measure company's ability to pay short-term obligations.

Quick Ratio : For determining ability to meet its short-term obligations with its most liquid assets.

Cash Ratio : To measure company's ability to repay its short-term debt with cash or near-cash resources.

Profitability Ratios

Profit Ratio : To gauge the degree to which a company or a business activity makes money.

Return on Earnings after Tax :It shows how well the company controls its costs.

Return on Asset : Profitability of the company relative to its total assets.

Operating Margin ratio : Measures how much profit a company makes on a dollar of sales

Activity Ratios

Asset to turnover : To measure the value of a company's sales or revenues relative to the value of its assets

Receivables to Turnover : Measure how effective a company is at extending credits and collecting debts

Dividend Payout : earnings paid out as dividends to shareholders

The following ratios are typically related to service sector :

1. Average Revenue per user - Telecom services
2. Occupancy ratio - Hospitality services
3. Average Daily rate - Hospitality services
4. Capital Adequacy ratio - Banking services
5. Loan to deposit ratios - Banking services
6. Cash reserve ratios - Banking services
7. Sales per square fit - Retail
8. Revenue per employee - Banking services
9. Fixed mileage cost ratio - Logistic services

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