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Finance Accounting Ratios Brief Presentation

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Accounting Ratios • • • • • • • A financial ratio is a relationship between two quantities on a company’s financial statements, which is derived by dividing one quantity by another. The purpose of using ratios is to reduce the amount of data to a workable form and to make it more meaningful. This goal is defeated if too many ratios are calculated. There are hundreds of ratios which could be calculated. A manager must learn which combination of ratios is most appropriate in a specific situation, remembering that ratios seldom provide conclusive answers; Ratios lead the manager to ask the right questions and sometimes give clues as to possible areas of corporate strength or weakness. Accounting Ratios • Liquidity Ratios Liquidity ratios are designed to measure a company’s ability to meet its maturing Short-term obligations. • Profitability Ratios Profitability ratios are designed to measure management’s overall effectiveness: Does the company control expenses and earn a reasonable return on funds committed? • Capital Structure Ratios Capital structure ratios are divided into two groups which are: (a) those that examine the asset structure of the company; and (b) those that analyse the financing arrangements of the company’s total assets, in particular the extent to which the company relies on debt, known as the gearing ratios. • Efficiency Ratios Efficiency ratios give an indication of how effectively a company has been managing its assets. Ac ...
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Very useful material for studying!