Question

Explain the importance of the financial ratios in making investment decisions and in running a corporation.

Answer 1

Importance of ratios in investment decisions and running a corporation are as follows-

A. financial ratios will be helpful in determination of the liquidity of the company and it will help the organisation in order to select all such projects which are providing the company with the adequate liquidity

B. financial ratios will also helpful in determination of all the projects which will be resulting into higher cash flows and lower payouts in this short period of time so that company will be having a higher liquidity in its hands.

C. financial ratios will also be helpful in capital restructuring decision when there will be a determination of raising of the finances from the market and it will be helpful in determination of the total debt to the total equity ratio and it will help in estimating the overall solvency of the company

D. financial ratio will also offer with the comparability with the other companies in the same industry and it will offer with the chance to derive the company's underperformance & outperformance in the industry based standards

E. financial ratios will also be helpful in determining the effectiveness of the utilisation of the assets by the manager and it helps in generating higher turnover.

F. Financial ratios are also a basis for forecasting of the future performance of the company for managers

G. Financial ratios will be helpful in better decision making and risk management also.