Question

"Financial Analyst Skills" Please respond to the following:

Assess the key ratios for profitability, liquidity, and solvency used by financial analysts to evaluate the financial performance of a company. Next, indicate one (1) ratio from each of the three (3) categories (profitability, liquidity, and solvency) that you believe to be most indicative of future performance. Use actual ratios from a company of your choice to provide support for your rationale.

Answer 1

1. Key Ratios of Profitability are

Gross margin ratio - Compare gross margin with sales

Profit Margin - Compare net income to sales

Return on asset - Compare net income to total asset

Return on capital employed - Compare net operating profit to capital employed

Return on equity - Compare net income to Share holder's equity

2. Key Ratios of Liquidity are

Current Ratio - Compare current asset with currrent liability

Quick Ratio - Compare liquid asset with current liability

3. Key ratios of Solvency are

Debt to Equity Ratio - Compare total liabilities with equity

Interest coverage ratio - EBIT/Interest Expenses

Debt Ratio - Compare total liability with debt

For profitability ratio most indicative of future performances you can get from Return on Asset. As the same is showing the return from the asset you have invested in others may vary in future.

For Liquidity ratio most indicative of future performances you can get from Current ratio which shows the streangth of the company in repaying it current liabilities.

For Solvency ratio most indicative of future performances you can get from Interest coverage ration which shows the companys ability to to repay the interest and borrowings from its earnings.

For practical example I can not provide any infromation for data integrity issues.