Description
Assignment 2: Discussion—Applied Ratio Analysis
Access an overview of your course project.
By the due date assigned, respond to the following in the Discussion Area below:
This module you are using financial analysis tools to evaluate the financial health of companies. One tool you are learning about is financial ratios and you can use this summary of financial ratios as a guide. You will be combining your findings from this discussion response into your final course project paper in Module 5.
There are three categories of financial ratios: liquidity, solvency, and profitability.
- Describe what each category tells the user about the financial health of a company.
- Choose three ratios in each category and describe what the ratios tell the user about the company. How are financial ratios used to evaluate a company?
- Discuss what the numbers would be compared against for analysis.
- Calculate each ratio for your companies. What do the ratios tell you about each of your companies?
Be sure to cite any sources using APA style. You may use this APA Citation Helper as a guide.
Through the end of the module, provide substantive responses to at least two other students' initial posts, as well as any posts to you by your instructor. Be sure to post to the Discussion Area on two different days to meet your weekly attendance requirement.
Explanation & Answer
Done, for the company ratios, I used Apple inc as our example, thanks
Running head: FINANCIAL RATIOS
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Financial Ratios
Name of student
Professor’s name
Course title
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FINANCIAL RATIOS
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Description of liquidity, solvency, and profitability financial ratios
Liquidity ratios measure ability of firms to pay both long-term and short-term debt
obligations. The main example of a liquidity ratio is the current ratio. It is the ration of firm’s
current assets to its current liabilities. Current ratios measures ability of an organization to pay its
short-term bills. An effective current ratio should remain above 1. Current ratio of less than 1
indicates that the company has more liabilities than assets thus unable to pay for its obligations. A
higher current ratio indicates safety cushion thus more investors will be willing to transact with
the firm (Bull, 2008).
Solvency ratios are used by firms to measure their financial stability. It is a ratio used by
firms to measure debt relative to both assets and equity. Firms with a higher debt are not flexible
to manage their cash flows in case of an increase in the interest rates rise or deterioration of
business conditions. The main types of solvency ratios are debt-to-equity ratios and the debt-toasset ratios.
The profitability ratios represent ability of firm’s management to convert sales-dollars into
profits and cash-flow. The main types of profitability ratios constitute of: Operating margin ratios,
gross margin and the net-income margin. The gross margin is expressed as a ratio of company’s
gross profits to sales (Bull, 2008). Additionally, the gross profit is expressed as firm sales less the
cost of goods sold. Lastly, the operating profit ratio is expressed as the gross profit less the firm’s
operating expenses.
Three ratios in each category
The three main types liquidity ratios are: Acid test ratio, cash ratio and the current ratio.
Acid-test ratios are also referred to as quick ratio. Acid ratios are used by firms to measure their
current (short term) liquidity. This is done by comparing the company’s current assets to the
FINANCIAL RATIOS
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current liabilities. Cash Ratios are also referred to as cash-asset ratio. It compares the firm’s ratio
of cash and cash-equivalent assets to its liabilities. Cash ratio measures the extent or ability of an
organization can pay-off its current liabilities. Current ratio is used by firms to measure their
liquidity. Alternatively, current ratio indicates ability of an organization to meet its short-term debt
obligations.
The three main types of solvency ratios constitute of: Deb...
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