Question

The new CEO of Everton Sdn Berhad, a company in the furniture sector would like to know the usefulness of key financial ratios that would be crucial for his management team to consider and analyse for the purpose of acquiring another entity in a similar industry.

Answer 1

Financial Ratios are very crutial fro Financing descisions. It is a speedy method of getting idea of Financial Soundness of a Company. The investors are able to compare a Company with other industries in the same sector.

Key ratios we should Consider

1. PE Ratio:Price Earnings ratio is the ratio of company’s current share price to its earnings per share.A low PE ratio can be termed as if the stock is undervalued.
2. Current ratio:-The current ratio indicates whether or not a company has enough short-term assets to cover its short-term financial obligations. It measures the Company's short term FInancial health.
3. Debt-Equity ratio:- The debt equity ratio shows the percentage of company financing that comes from creditors and investors. A higher ratio indicates that more creditor financing (bank loans) is used than investor financing (shareholders).
4. Operating Profit Margin-Operating margin is a measure of profitability. It indicates how much h profit a company makes on a dollar of sales, after paying for variable costs of production.
5. Return on Equity:- A business with good returns may generate enough cash internally for its expenses.
6. Asset Turnover ratio- It is the ability of a company to deploy its assets to increase sales.
7. Dividend Yield:- It shows the amount the inverstor receives(in percentage) as a percentage of the Price of share.