FINANCIAL RATIOS

Financial Ratios are useful indicators of a firm's performance and financial situation. It is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Many standard ratios are used to evaluate the overall financial condition of a corporation and to compare the firm's financials to those of other firms. In some cases, ratio analysis can predict future bankruptcy.

Financial ratios may be used by managers within a firm, by current and potential shareholders/ owners of a firm, and by a firm's creditors. Security analysts use financial ratios to compare the strengths and weaknesses in various companies. It can help to answer critical questions such as whether the business is carrying excess debt or inventory, whether customers are paying according to terms, whether the operating expenses are too high and whether the company assets are being used properly to generate income. Examining these ratios over time provides some insight as to how effectively the business is being operated.

Financial ratios quantify many aspects of a business and are an integral part of financial statement analysis. They are categorized according to the financial aspect of the business which the ratio measures.

Liquidity Ratios - measures the availability of cash to pay debt.

Asset Turnover Ratios – measures how efficiently the firm utilizes its assets.

Financial Leverage Ratios - measures the Long term solvency of the firm.

Profitability Ratios - measures the firm's use of its assets and control of its expenses to generate an acceptable rate of return.

Dividend Policy Ratios - provides an insight into the dividend policy of the firm and the prospects for future growth.