Financial Ratio

FINANCIAL RATIO 3

It is more significant to make a comparison of financials acrosscompetitors instead of over time. Financials across competitors, overtime, provide the enterprise with a quantitative evaluation, whichmay be employed in the formation of benchmarks employed incomparative analysis (Riahi-Belkaoui,1998). Thecomparative analysis makes it probable for owners to make acomparison of their business’ financial ratio information with thatof competitors. For instance, financial leverage ratios measure theorganization’s lasting solvency. The information is important incalculating how properly competitors are employing debt, as well asequity financing in conducting their company operations(Riahi-Belkaoui,1998). In anotherillustration, when comparing profitability ratios to competitors, itis probable to tell the amount competing organizations get followingconsumer goods sale. The financials compared present a business ownerwith the amount of gross earning organizations get on total sales.High percentages demonstrate competitors have more resources forreinvesting in business.

Ratios make it easy for the business owners to identify businesstrends, in addition to making a comparison of performance andsituation with the standard performance of the same business withinthe similar industry (Lewellen,2004). One illustration on how to analyze financial ratios isthe balance sheet. Relevant balance sheet ratios determine thecapability of a company to cater for expenses as they arise andleverage, which include current, liquidity, working, quick andleverage ratios. They determine how to change assets to cash currentratio is the amount of current assets divided by liabilities, whileworking capital is determined through subtracting all current assetswith liabilities. Liquidity ratios provide investors a notion of thebusiness’ capability in raising money to buy extra assets.Receivables turnover ratio falls under liquidity and is the netcredit sales divided by mean account receivable.

References

Lewellen, J. (2004). Predictingreturns with financial ratios.&nbspJournalof Financial Economics,&nbsp74(2),209-235.

Riahi-Belkaoui, A.(1998).&nbspFinancialanalysis and the predictability of important economic events.Westport, Conn: Quorum Books.