Question

Define the major financial indicators and ratios used to assess financial standing, and for the purpose of financial analysis of a corporation. State the significance of each.

Answer 1

Following are the major financial indicator and ratios that are used to assess financial standing and also for the purpose of financial analysis of corporation-------------

1. Profitability ratio--------profitability rati are the financial matrics used by the analysts and investors to measure and evaluate the ability of a company to generate the income relative to revenue , balance sheet assets, operating costs, and shareholder equity during the specific period of time. it dermine the overall effictiveness of management regarding returns generated on sales and investment. it include gross profit ratio, operating profit ratio, and net profit ratio. gross profit measures the profitability after considering cost of good sold. operating profit ratio measures the earning before intrest and tax. and net profit ratio measures the all expenses in the account.

2. Effcency ratio-------------Efficency rato measures the effectiveness of management. efficency ratio are used in a decision making ratio. efficency ratio evaluate the turnover and return on investments. it include inventory ratio, sales to rescivables and return on assets, inventory turnover measures the number of times an entire stock of inventory is repurchased while sales to receivables compare trade receivable to revenue.

3. Liquidity ratio----------liquidity ratio uses financial statement to evaluate the company and ability to meet its current obligations. liquidity rato evaluate the ability of company to convert its current assets into cash and pay current obligations. liquidity ratio are current ratio and quick ratio. current ratio is obtained by dividing current assets and current liability.

4. solvency ratio----------solvency ratio judge the ability of the company to raise capital and pay its obligations. solvency ratio include debt to worth and working capital , determine wheather an entity is able to pay all of its debts. banker often include leverage ratio, as debt . debt ratio is calculated by total liabilities divided by net worth. working capital is calculated by substracting the current liabilities from current assets.