The Role of Financial Ratios

4973 words 20 pages
The Role of Financial Ratios

Table of content

Introduction 3
Chapter 1. Notion and types of ratios. 4
1.1 Liquidity ratios. 5
1.2 Financial leverage ratios 7
1.3 Funds management ratios 9
1.4 Profitability ratios 12
Chapter 2. Use of financial ratios. 15
2.1Use and Limitations of Financial Ratios 15
2.2 Used financial data 15
2.3 Financial ratios calculated for The Apple Company 16
2.4 The Dupont Model 18
Appendix 1 21
Conclusion 23
Bibliography 24

I have chosen this topic for my coursework because I find ratio analysis the most common way to evaluate the performance of an enterprise and its interest for investor. As in future I plan to work in a financial department, this analysis was of great interest for me.
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* Increasing current assets from new equity contributions. * Putting profits back into the business.
The Quick Ratio is sometimes called the "acid-test" ratio and is one of the best measures of liquidity. It is figured as shown below: Cash + Government Securities + Receivables
Quick Ratio = _________________________________________ Total Current Liabilities
The Quick Ratio is a much more exacting measure than the Current Ratio. By excluding inventories, it concentrates on the really liquid assets, with value that is fairly certain. It helps answer the question: "If all sales revenues should disappear, could my business meet its current obligations with the readily convertible `quick' funds on hand?"
An acid-test of 1:1 is considered satisfactory unless the majority of your "quick assets" are in accounts receivable, and the pattern of accounts receivable collection lags behind the schedule for paying current liabilities.
Working Capital is more a measure of cash flow than a ratio. The result of this calculation must be a positive number. It is calculated as shown below:
Working Capital = Total Current Assets - Total Current Liabilities
Bankers look at Net Working Capital over time to determine a company's ability to weather financial crises. Loans are often tied to minimum working capital requirements.
A general observation about these three Liquidity Ratios is that the higher they are the better, especially if


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