Question

Enumerate the ratio that measure a firm's overall effectiveness and specify the related formula​

Answer 1

Answer:

Financial statement analysis is a judgmental process. One of the primary objectives is identification of major changes in trends, and relationships and the investigation of the reasons underlying those changes. The judgment process can be improved by experience and the use of analytical tools. Probably the most widely used financial analysis technique is ratio analysis, the analysis of relationships between two or more line items on the financial statement. Financial ratios are usually expressed in percentage or times. Generally, financial ratios are calculated for the purpose of evaluating aspects of a company's operations and fall into the following categories:

Answer 2

Financial ratios express relations between items in financial statements. Although historical data are available, management ratios can be used to assess internal strengths and weaknesses and to predict potential financial results. To compare companies within the same sector, investors may use ratios. Ratios are usually not significant, but significant compared with the typical historical data and industry.

Explanation:

• Liquidity and Current Ratio: The current ratio, which corresponds to  current assets to current liabilities, is the most common liquidity ratio. That ratio demonstrates the willingness of a company to pay its short-term liabilities. Usually, a ratio of more than one is minimum because anything less than one means that the company has more liabilities than assets. A high ratio implies a more robust security buffer since certain stock products and receivable balances can not easily be transformed into cash.

1. Current Ratio= Current Liabilities/Current Assets​​

• Solvency Ratios: Solvency ratios demonstrate financial flexibility as they calculate the debt of the company in terms of its assets and capital. If interest rates increase, or if market conditions deteriorate, a company with too much debt may not be able to control its cash flow. The common solvency ratios are debt-to-equity and debt-to-asset.

1. Debt/Equity =Total Shareholders’ Equity/Total Liabilities​​
2. Debt ratio = Total assets/Total debt​​

• Profitability Ratios: Profit ratios reflect the capacity of management to translate sales  to profits and cash flow. Gross margin, operating margin and net profit margin are the typical ratios.

1. Gross Margin Ratio = (Revenue – COGS) / Revenue; where Gross Margin= Net Sales−COGS, where COGS=Cost of goods sold​
2. Net profit margin = Net income/ sales; where Net income ÷ total sales = net profit margin; total sales - (cost of goods sold (COGS) + operating costs) = net income
3. Operating Profit margin = Operating profit/Total revenue; where Operating Profit = Operating Revenue - Cost of Goods Sold (COGS) - Operating Expenses - Depreciation - Amortization

• Efficiency Ratios: Two common efficiency ratios are receivables turnover and inventory turnover.  A high inventory turnover ratio implies that the firm is successful in converting its inventory into sales. A high accounts receivable turnover implies that the firm is successful in collecting its outstanding credit balances.

1. Inventory Turnover ratio= COGS/Average Inventory; where Average Inventory = (Beginning Inventory + Ending Inventory) / 2
2. Accounts Receivable Turnover=Net credit sales/Average Accounts Receivable; where average receivables is (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

To know more

Financial ratios used to determine credit risk include an assessment of

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